The Other “Carry Trade” Currency
The Swiss Franc has played second fiddle to the Japanese Yen as the currency of choice for the borrowing side of the so-called “carry trade.” In these setups, investors borrow funds in a low-yielding currency such as the Yen or the “Swissy,” and lend funds in a higher-yielding currency such as the Australian or New Zealand Dollar. The ultimate goal is to hopefully profit from the difference in yields, but risk comes into play if the borrowed currency rises more than the lending currency. Switzerland’s short-term rate is the second lowest of the major world economies, thus making it a solid choice as an alternative to the Yen for carry trade speculators. This morning, the Swiss National Bank is expected to raise interest by 25 basis points to 2.75% to help keep inflation under control. This move is counter to the ECB’s decision to keep rates steady, as fears of a slowdown in world economic growth due to the U.S. subprime loan situation and recent short-term credit crunches had central bankers shifting their focus temporarily away from inflation and more toward recent economic events. The Franc has already risen 2.1% versus the Greenback this month alone, and another rate hike may force traders to continue to unwind carry trades involving the Swissy, which might continue to stoke the Franc’s rise against the U.S. Dollar.
Looking at the weekly chart for Swiss Franc futures, we notice prices trading at highs not seen since 2005. Prices are above all of the major moving averages, and the uptrend – which officially started back in late 2005 – looks firmly intact. The 14-period RSI appears strong with a current reading of 67.32. 0.8756 is seen as the next major resistance point, with support found at 0.8375. December Swiss Franc futures are currently trading at 0.8516, up 0.0012.
Mike Zarembski, Senior Commodity Analyst
