Swiss franc climbs as carry trades wobble and haven demand builds

What shifted and why the franc moved

In October, unrest and political upheaval in France hurt performance on franc-funded carry trades, prompting investors to scale them down. Asset managers have reduced bearish CHF exposure, CFTC data show, while leveraged funds still sit heavily net short - positioning that could flip if risk aversion persists.

Gregor Hirt, Allianz Global Investors' global chief investment officer with oversight of multi-asset strategies, said, "If risk aversion persists, that residual position is a potential source of additional franc demand." Following Nvidia Corp.'s leadership crisis, haven flows put the franc at the front of the pack on Thursday, with the currency up 0.2% at 0.92268 per euro. It ended last week at 0.91376, its firmest euro level since May.

Policy signals and the demand backdrop

On Wednesday, Swiss National Bank officials informed the government that the central bank is prepared to intervene in foreign-exchange markets if necessary. JPMorgan strategists expect the SNB to smooth sharp swings rather than "entirely stop or reverse franc appreciation."

Beyond speculative flows, Switzerland's sturdy economy and low public debt create "structural demand" for the franc, according to Florian Ielpo, who leads macro at Lombard Odier Investment Managers. That bid is especially relevant while European politics remain strained.

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How traders are positioning now

Scotiabank's Shaun Osborne said a drop below 0.90 per euro would be "uncomfortable for policymakers, especially if the franc gains were rapid," and he projects 0.93 by year end. With Swiss inflation rising to 1.5% in October from 1% the prior month, Osborne added that the SNB could be more accepting of a stronger franc.

At Russell Investments, Van Luu, who runs currency and fixed-income strategy, prefers to express the view by selling CHF versus JPY rather than against the euro. Because both are havens, he sees less risk that political flare ups will upend the trade. He estimates the yen is about 50% undervalued against the dollar, while the franc is roughly 20% overvalued versus the greenback.

The bottom line for your portfolio

European political risk that has lingered alongside France's budget talks makes it hard for real-money investors to rebuild bets on a weaker franc, Hirt said. "For European target assets in particular, franc funding currently amounts to being short the regional haven against regional risk," he said. "We would be cautious there while French spreads remain elevated."

In plain English: thinner carry cushions, steady haven demand, quicker inflation last month, and an SNB inclined to smooth rather than stop moves all point to a stronger franc shaping CHF funding costs and euro exposures.

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