The logic of the yen's "cheap funding" has changed! Capital is repositioning for "Carry Trade" as the Swiss franc and Swedish krona compete for the funding currency slot.

Title context: The logic of the yen's "cheap funding" has changed! Capital is repositioning for "Carry Trade" as the Swiss franc and Swedish krona compete for the funding currency slot. Text: Around the yen exchange rate, carry trades (i.e., the Carry Trade model) appear to be undergoing a weakening of financing advantages and a restructuring of funding sources. The yen's appreciation trajectory is eroding the yen's appeal as a carry funding currency, prompting investors to consider alternatives such as the Swiss franc and Swedish krona. If this major adjustment is accompanied by a contraction in financial market leverage and large-scale selling of highly liquid risk assets such as equities and bonds, it could create significant selling pressure on related stocks, bonds, and high-yielding currencies. Rising expectations for Bank of Japan rate hikes, combined with joint U.S.-Japan buying of yen intervention, have substantially increased the overall exchange-rate risk of borrowing low-interest-rate yen to hold overseas assets in the recent period. A survey of economists published in September showed that respondents generally expect the Bank of Japan to raise its policy rate to 1.25% on September 18 and to reach 1.75% in the second quarter of 2027, the highest benchmark rate in decades. Statistics compiled by institutions show that the classic carry strategy of selling yen and buying Australian dollars returned about 9% in the first half of this year, but has lost about 1.3% since July. For financial market investors, what determines a trade's attractiveness is not only the interest rate at which money is borrowed, but also the cost of repaying debt when the funding currency suddenly appreciates. Carry trades (Carry Trade) typically involve borrowing in a low-interest-rate currency, converting it into another currency, and allocating it to higher-yielding assets in order to earn a return after deducting financing costs. If exchange-rate risk is not fully hedged, yen appreciation means that repaying the same amount of yen requires more foreign currency, and exchange losses may devour previously accumulated interest-rate differentials. When leverage is used, losses and margin calls may also force investors to sell stocks, bonds, or high-yielding currencies and then buy back yen to repay debt, thereby amplifying cross-market volatility. The Bank for International Settlements' study of the August 2024 turmoil pointed out that the unwinding of leveraged trades and rising margin requirements amplified the shock of financial market selling. The yen's financing advantage is receding, and global carry trades are looking for a new fulcrum Competition to replace the funding currency has already begun, with the Swiss franc, Swedish krona, and Canadian dollar each having appeal and each carrying risks. It is understood that Wall Street asset management and investment giants Russell Investments and Allianz Global Investors prefer the Swiss franc, while Wall Street commercial banking giant JPMorgan favors the Swedish krona and Canadian dollar as funding choices and recommends selling the latter two and buying the U.S. dollar. The Swiss National Bank kept its policy rate at 0% in June, contrasting with Japan's direction of tightening policy; however, borrowing in low-interest-rate Swiss francs also exposes investors to its safe-haven appreciation risk, as European political turmoil or a rise in global risk aversion could erode carry returns. The Swedish krona and Canadian dollar are more sensitive to the economic cycle. Therefore, funding choices require comparing interest-rate differentials, exchange-rate volatility, market liquidity, and position crowding at the same time, and part of the demand for yen may be dispersed rather than fully replaced by any single currency. As for where funds overall go after the yen carry trade recedes, it first depends on whether investors are changing funding sources or reducing total leverage. If they remain bullish on the original assets, investors can borrow currencies such as the Swiss franc, convert them, and repay yen liabilities, retaining overseas investments; this means the funding structure changes, and funds may not necessarily withdraw from stocks or bonds. If they choose to close positions, the proceeds from selling assets are first used to buy back yen and repay debt, and only the remaining own funds may shift into cash, short-term government bonds, or other investments. In other words, the retreat of yen carry trades can manifest as switching funding currencies, reducing leverage, or both occurring at the same time. If investors switch to funding in currencies such as the Swiss franc, they may continue to hold their original overseas assets; if they close positions and deleverage, they may sell related assets and settle yen-funded positions. Therefore, carry trade adjustments do not correspond to a single direction of fund flows, and whether a new investment allocation can form depends on the remaining funds after position closure and investors' choices. At the same time, Japanese institutions will also re-compare the yields on domestic bonds and foreign bonds after currency hedging, and some new allocations may remain in Japan. The International Monetary Fund pointed out that rising Japanese bond yields may affect global asset allocation, but adjustments by large institutions are usually gradual. What can be judged from this is that funding currency diversification, partial deleveraging, and increased domestic Japanese allocation may occur simultaneously. For long-term funds still willing to bear equity risk, whether AI computing power themes and assets related to AI applications can continue to obtain allocations depends more on whether commercial returns can cover funding and the high cost of building AI computing power infrastructure. From a technical mechanism perspective, AI inference and agent tasks will continuously call models, retrieve materials, and verify results, creating opportunities for recurring service revenue while also generating ongoing computing, storage, and network costs; growth in usage alone is not enough to infer profit growth. If model and system optimization can reduce rework, improve task success rates, and enable customers' cost savings or additional revenue to exceed deployment costs, it can support more stable paying demand. Therefore, in a scenario of tighter financing constraints, companies with ample cash flow, verifiable AI revenue, and reasonable capital returns are better positioned to attract long-term capital. On September 15, media reports said Japanese investors still net bought about 1.3 trillion yen of overseas stocks in August, indicating to some extent that Japanese funds' overseas allocation and yen carry trade unwinding can coexist. The yen's financing appeal weakens, and carry traders turn their eyes to the Swiss franc and Swedish krona As the yen has recently surged, making it a less reliable funding choice than before, currencies such as the Swedish krona and Swiss franc are becoming the main candidates for carry trade funding currencies. Russell Investments and Allianz Global Investors prefer the Swiss franc, citing the widening monetary policy divergence between Switzerland and Japan; JPMorgan strategists instead recommend the Swedish krona and Canadian dollar, viewing them as attractive choices. These currencies are all competing for the yen's place in carry trades. In such trades, investors borrow in lower-yielding currencies and buy higher-yielding assets. For decades, the yen has been traders' preferred currency to sell, but now, as Japanese bond yields rise and joint U.S.-Japan intervention to support the yen highlights a preference for higher Japanese rates and a stronger yen, the yen's appeal is weakening. "Investors still want to participate in carry trades, but the interesting question is which funding currency to choose," said Van Luu, head of currency and fixed income strategy at Russell Investments. He said Japan's two interventions this year to support the yen and prepare investors for higher rates have effectively signaled a desire for a stronger yen. By contrast, Switzerland is expected to keep rates at zero until the end of 2027 and seems content to let the franc weaken to support its exporters. Luu added: "If people shift the funding currency from the yen to other currencies, then the Swiss franc becomes the most attractive option, both from a valuation perspective and from the perspective of monetary and exchange-rate policy." Return performance shows that the appeal of yen-funded carry trades is weakening. Selling yen and buying the Australian dollar, the highest-yielding currency in the G10, would have produced a 1.3% loss since July, compared with a 9% gain in the first half of the year. By contrast, investors funding in Swiss francs would have earned a total return of 14% in 2026. As shown in the chart above, carry trades around the yen are shiftingreturns on trades funded in Swiss francs are rising, while returns on trades funded in yen are declining. The yen has appreciated 3.3% this month, after a similar-sized rise following intervention in July, while the yield on two-year Japanese government bonds has more than doubled so far this year. The Swiss franc, meanwhile, is facing selling pressure, down more than 1% against the dollar and 4.4% against the yen. Neil Jones, managing director of FX sales and trading at TJM in London, said: "Selling the franc and buying the yen largely reflects a long-term shift in how funding currencies are used." This trade is not without risk. The yen's liquidity remains far higher than that of most other currencies, and carry strategies work when exchange rates are stablebut the Swiss franc is one of the world's major safe-haven assets and tends to appreciate sharply during periods of geopolitical tension. Greg Hirt, chief investment officer for multi-asset strategy at Allianz Global Investors, believes the Swiss franc can be a viable "complement" to the yen, but he also stressed that volatility may emerge around elections in Italy and France next year. He added: "The Swiss franc is to a large extent a safe-haven currency in the face of European risks. If something really goes wrong in France, the Swiss franc will strengthen noticeably." Japan's intervention has also broken another long-standing relationship that is crucial to carry trade returns. For decades, the yen has been the currency most sensitive to U.S. interest rates, often weakening as the yield on two-year U.S. Treasuries rises. Now, other currencies have taken its place. Meera Chandan, co-head of global FX strategy at JPMorgan, said that because of their low yields and sensitivity to the economic cycle, the Swedish krona and Canadian dollar are the most vulnerable when global rates rise. She recommends selling both currencies and buying the U.S. dollar; market expectations that the Federal Reserve may raise rates twice this year are providing support for the dollar. Chandan said: "If you compare them with high-yielding currencies in developed markets such as Australia and Norway, or with higher-yielding emerging market currencies, there is actually a fairly large yield gap." She added that the Swiss franc and New Zealand dollar also fit her screening criteria.