Hedge funds are starting to bet against the Swiss franc and are using the currency to finance purchases of the higher-yielding British pound in a trade driven by diverging central bank policies. The move is a classic “carry trade,” a strategy where investors borrow in a currency with low interest rates to buy a currency with higher rates, aiming to pocket the difference. While the most popular version of this trade involves the U.S. dollar and Japanese yen, Patrick Ernst, a strategist at UBS Global Wealth Management, described the pound-franc pairing as an “interesting intra-European alternative.” One catalyst for the trade has been a sharp appreciation in the franc, which Barclays analysts termed a “deflationary shock” for the Swiss economy. The currency strengthened by over 11.3% against the U.S. dollar following President Donald Trump’s tariff announcements on April 2, pushing it near its most expensive levels in a decade in real terms. Swiss strength a ‘real nuisance’ Investors have rushed into the Swiss franc owing to its perceived safe haven status amid increasing global geopolitical and economic concerns. CHF= 5Y bar To combat deflationary pressures from a strong currency, the SNB cut interest rates on June 19 to become the first central bank to re-enter a zero-policy rate environment. However, the desired effect on the currency has proven to be elusive. “The Swiss National Bank would love it if people were to sell the Swiss franc,” said Jane Foley, head of FX strategy at Rabobank. “It’s a real thorn in their side, the strength of the Swissy.” “The fact that it is a safe haven is not something that they would wish on anyone. It’s a real nuisance to them,” she added. The recent strength in the franc has also meant that short sellers, who bet on falling values, have lowered their wagers relative to the end of last year. “Our flow and positioning indicators suggest that CHF shorts are not at extreme levels, i.e., there is potential for more,” said UBS Wealth Management’s Ernst. Weighing up the pound While bets against the franc are building, positioning on the British pound conveys the opposite sentiment. The pound’s appeal in the carry trade stems from the cautious stance of the Bank of England, which has signaled only gradual policy easing. The U.K. central bank’s base rate currently stands at 4.25%. With inflation remaining “stubbornly high,” the central bank is expected to proceed more slowly with rate cuts, maintaining a significant yield advantage for sterling. This growing divergence is what makes the pound an attractive investment funded by borrowing in the lower-yielding franc. This dynamic is also expected to persist in the near future as UBS’ Ernst does not expect the BOE to increase its pace of cuts beyond its quarterly base case. “The latest central bank meetings in the UK and Switzerland underlined once again that the vast interest rate differential between the two economies is unlikely to fade quickly,” Ernst said in a note to clients on June 20. He added that the view holds even as recent UK labor market data has shown some signs of weakness. The persistence of high inflation is seen as the overriding factor that will keep the BOE on its cautious path. The carry trade The diverging central bank trends have prompted specific recommendations from major banks. Barclays has advised clients to enter a long GBP/CHF position — which overweights sterling and underweights the franc — targeting a move to 1.15 with a stop-loss at 1.06, in a note to clients in April. More recently, in June, UBS forecasts the pair will appreciate toward 1.13 and remain in a 1.10 to 1.15 range. The trade is not without significant risks, though. A primary concern is a global risk-off event or “more geopolitical and trade risks” that could trigger safe-haven flows back into the Swiss franc. A sudden geopolitical event could cause the franc to rally sharply, which could completely erase the profit from the carry and “even leave you in the red,” explained Foley. Despite the clear rationale, many investors who were in the trade at the start of the year were “burnt” by a “shocking” drop in April after the Trump administration’s tariff announcement proved harsher than expected, Steve Englander, global head of G10 FX research, said. As a result, he noted, traders are going to be more cautious to be the “first one in on that trade” again.
