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Hedge funds eye betting against the Swiss Franc over carry trade rebound
Hedge funds eye betting against the Swiss Franc over carry trade rebound

CNBC

time4 days ago

  • Business
  • CNBC

Hedge funds eye betting against the Swiss Franc over carry trade rebound

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.

Morning Bid: Trying to contain US market contagion
Morning Bid: Trying to contain US market contagion

Yahoo

time22-04-2025

  • Business
  • Yahoo

Morning Bid: Trying to contain US market contagion

(Reuters) - A look at the day ahead in European and global markets from Wayne Cole. There is an old saying that when the U.S. sneezes, the world catches a cold. But if the malady is a self-inflicted wound, is contagion inevitable? There might be a hint of that in Asian markets today given the Nikkei is flat even though the S&P 500 shed 2.4% on Monday. Usually it would be down 1,000 points. And that's despite a stronger yen. After all, the money fleeing U.S. assets has to go somewhere, and not just to European defence stocks. Thus, according to LSEG Lipper data, investors bought a net $11 billion in European equity funds and $3.6 billion in Asian equity funds in the week to April 16, while U.S. equity funds saw an outflow of $10.6 billion. Since then, President Trump has upped the stakes by attacking Fed Chair Powell for not cutting rates as speedily as Trump would like. It's not clear if he has the power to fire the Chair, but just the appearance of threatening the independence of the central bank is another body blow for investor confidence in the full faith and trust of the United States. That saw the dollar hit another decade low on the Swissy at 0.8842, bringing losses since "tariff day" - calling them reciprocal is an insult to the English language - to more than 8%. The euro has popped above $1.1500 and the dollar is testing the 140.00 yen bulwark. Foreign investors in the U.S. who were unhedged have had a particularly painful April. Yields on 10-year Treasuries climbed to 4.41%, extending the recent jump in term risk. If Trump would consider forcing Powell out and appointing a loyalist, then the idea of, say, replacing Treasuries with zero coupon perpetual bonds might not seem so unthinkable. It's also counterproductive for Trump, since now the Fed might be less willing to cut rates for fear of being seen as bowing to political pressure. It was notable that Fed fund futures are down and remain 90% against a rate cut in May. There are at least five Fed speakers on the diary today and it'll be interesting to see how they handle this thorny political issue. Dodge, maybe. Also out today are Tesla's results, so investors will get to see how much bad news is already in the share price. Key developments that could influence markets on Tuesday: - ECB members Knot and de Guindos speak, BoE's Breeden - Fed members speaking include Jefferson, Kugler, Barkin, Kashkari and Harker - EU consumer confidence, US Richmond Fed survey (By Wayne Cole; Editing by Muralikumar Anantharaman) Sign in to access your portfolio

Battered dollar steadies but investors brace for more tariff volatility
Battered dollar steadies but investors brace for more tariff volatility

Yahoo

time14-04-2025

  • Business
  • Yahoo

Battered dollar steadies but investors brace for more tariff volatility

By Rae Wee SINGAPORE (Reuters) - The U.S. dollar found some footing on Monday but was still near a three-year low after a bruising week that shook investor faith in the world's reserve currency as U.S. President Donald Trump's tariff plans whipsawed global markets. Investors braced for another volatile week as Trump's imposition and abrupt postponement of tariffs on goods imported to the U.S. continued to sow confusion. Currency markets held largely steady after the White House on Friday granted exclusion from steep tariffs for smartphones, computers and some other electronics imported largely from China, though Trump said over the weekend the move will be short-lived. "At this point in time ... it's been handled haphazardly, heavy-handedly and with weight, and those measures have created a great deal of uncertainty," said IG market analyst Tony Sycamore. "Those storm clouds, they're still circling, they haven't gone anywhere." The dollar was last up 0.34% against the Swiss franc, having fallen to a decade-low on Friday and clocking its worst week against the Swissy in more than two years. The euro fell 0.13% to $1.1344, after surging 3.6% last week and striking a three-year high on Friday as investors flocked to the common currency following a crisis of confidence in the dollar. "I think we could see the euro trading at $1.20 by something like ... end of July, early August," said IG's Sycamore. Growing nervousness among investors in owning U.S. assets has caused some to dump those positions and move money into markets including Europe, with that flow boosting the euro. Elsewhere, the yen fell 0.2% to 143.79 per dollar, while sterling slid 0.33% to $1.3084. The Australian dollar was up 0.15% to $0.63035, extending its more than 4% gain from last week. Against a basket of currencies, the U.S. dollar last stood at 99.73, not far from Friday's three-year low. "The market is re-assessing the structural attractiveness of the dollar as the world's global reserve currency and is undergoing a process of rapid de-dollarisation," George Saravelos, global head of FX research at Deutsche Bank, wrote in a client note. "Nowhere is this more evident than the continued and combined collapse in the currency and U.S. bond market." A steep sell-off in the U.S. Treasury market last week, owing in part to a rapid unwinding of so-called basis trades by hedge funds, was a huge drag on the dollar. Early on Monday, there was scant sign of any recovery in bonds with 10-year yields at 4.47% having seen the largest weekly rise in borrowing costs in decades. [US/] "We think the process of de-dollarisation has more to go, but we are keeping a very open mind as to how this process plays out and what the ultimate new equilibrium in the global financial architecture will be," said Saravelos. In other currencies, the New Zealand dollar was up 0.33% at $0.5843. The offshore yuan fell 0.17% to 7.2941 per dollar ahead of the open of trade in the onshore market later on Monday. The offshore unit struck a record low last week while its onshore counterpart sank to its lowest since 2007 as the trade war between the United States and China intensified. Sign in to access your portfolio

Morning Bid: Wall Street has most to lose from trust lost
Morning Bid: Wall Street has most to lose from trust lost

Reuters

time04-04-2025

  • Business
  • Reuters

Morning Bid: Wall Street has most to lose from trust lost

A look at the day ahead in European and global markets from Wayne Cole It's been another day of pain in Asia with the Nikkei down 3% and a stomach-churning 9.6% for the week, the biggest drop since the pandemic hit in March 2020. Wall St futures started steady but have since slipped around 0.7% while European stock futures are off 0.3% to 0.6%. The dollar is sitting on a weekly loss of 2.7% versus the yen and 3.0% on the Swissy, with the euro up 2.4%. So much for tariffs being bullish for the USD. It should be no surprise that capricious twists in U.S. policy have investors fleeing in fear: If you launch an unprovoked trade war on allies and opponents alike with no clear goal except, seemingly, to extract money or favours, don't be surprised when you're not top of investors' Christmas card lists. As analysts have noted, for decades now global investors have allocated 70% of their equity cash to U.S. stocks, way above the economy's 26% share of global GDP. If that preferred status is lost, say by starting a global trade war, money could well flow the other way. The sums involved would dwarf any tariff boost to the dollar from the U.S. buying fewer imports, while squeezing foreign investors with unhedged positions on Wall Street - that's most of them. As for encouraging more capital investment in U.S. manufacturing, what firm would want to take the risk when the White House can change the rules on a dime? If the idea is that these punishing tariff rates are just a bargaining ploy that can be moderated if countries pay enough to satisfy Trump, that merely underscores the problem. Unpredictability might be OK in game theory but not when you're a company risking billions of dollars in a years-long investment decision. Take Apple. Its supply chains are deeply embedded in Asia, where tariffs now range from 24% to 54%. Even if it could move some of its manufacturing to the States, a big ask, the resulting iPhones would cost multiples of what they do now. Apple's fat profit margins mean it's better able than most to absorb some of the tariff hit in the near term, but it's those Kobe beef-type margins that justify the stock's stratospheric price rating. And spare a thought for the Fed, caught between an almost certain spike in consumer prices and the mounting risk of recession as consumers and businesses cut back. Fed fund futures are up another 9 basis points for December today, implying 99 basis points of cuts this year. That's a certain sign that markets think rising unemployment will trump (sorry) the pop in inflation and force the Fed to ease. Bet Fed Chair Powell is really looking forward to his speech on the economy later today. Key developments that could influence markets on Friday: - EU construction PMI, German industrial orders, UK PMI - Speeches by Fed Chair Powell, governors Waller and Barr - US payrolls report for March By Wayne Cole; Editing by Edmund Klamann

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