Swiss Franc’s Role as a Funding Currency Expands as Volatility Remains Low – ING

The Swiss franc is increasingly being used as a funding currency in global markets, even as its volatility stays unusually low, according to a recent note from ING.

What is driving the franc’s funding role?

ING strategists point to the franc’s low volatility and the Swiss National Bank’s (SNB) accommodative stance as key factors encouraging investors to borrow in CHF to fund investments in higher-yielding assets. This so-called carry trade has gained traction as market conditions remain calm.

The franc has traditionally been seen as a safe-haven currency, but its low interest rates make it attractive for funding positions. With volatility subdued, the risk of sudden exchange-rate swings that could erode profits is perceived as lower, prompting more investors to use CHF as a funding source.

Implications for the Swiss economy and global markets

A growing funding role for the franc can have mixed effects. On one hand, it may increase demand for CHF, potentially supporting its value. On the other hand, if volatility spikes or risk appetite fades, unwinding of such trades could lead to sharp franc appreciation, which would hurt Swiss exporters.

ING’s analysis suggests that the current low-volatility environment is a key enabler. The SNB has also signaled its willingness to intervene in currency markets if needed, which may further dampen volatility and reinforce the franc’s appeal as a funding currency.

What should investors watch?

Market participants should monitor volatility indicators and SNB policy signals. A sudden rise in volatility could trigger rapid unwinding of carry trades, leading to CHF strength. Conversely, continued calm conditions could see the franc’s funding role expand further, influencing global capital flows.

Conclusion

The Swiss franc’s evolution as a funding currency is a notable trend in the current low-volatility environment. While it presents opportunities for carry trades, it also carries risks that could emerge quickly. As ING highlights, the interplay between volatility and SNB policy will be crucial in shaping the franc’s trajectory.

FAQs

Q1: What is a funding currency?
A funding currency is a currency with low interest rates that investors borrow to invest in higher-yielding assets elsewhere. The Swiss franc is often used for this purpose due to its low yields.

Q2: Why is low volatility important for carry trades?
Low volatility reduces the risk of exchange rate movements that could wipe out profits from interest rate differentials. It makes carry trades more attractive and less risky.

Q3: How could this trend affect the Swiss franc’s value?
Increased use of the franc as a funding currency could increase demand for it, potentially supporting its value. However, if market conditions change, unwinding of such trades could cause sharp appreciation, which might prompt SNB intervention.