CHF as a Funding Currency: A Deep Dive
The Swiss Franc (CHF) has long been regarded as a safe-haven currency, prized for its stability and resilience during periods of economic turmoil. However, beyond its role as a refuge for investors, CHF is also frequently used as a funding currency in global financial markets. But what makes the Swiss Franc such an attractive funding currency, and what are the implications of its use in this capacity?
What Makes CHF a Popular Funding Currency?
Several key factors contribute to the widespread use of CHF as a funding currency:
- Low Interest Rates: The Swiss National Bank (SNB) has maintained historically low interest rates, often in negative territory, to counteract the appreciation of the Swiss Franc. Low borrowing costs make CHF an attractive option for carry trades and funding purposes. With the Bank of Japan (BOJ) hiking rates in 2025, JPY is becoming less favourable as a funding currency, making CHF an even more attractive alternative.
- Safe-Haven Status: CHF is viewed as a stable currency, often strengthening during times of market uncertainty. Investors and financial institutions frequently use CHF to hedge risks, while businesses and traders leverage its stability to secure low-cost funding.
- Strong Banking System: Switzerland is home to one of the most stable and well-regulated financial systems in the world. This fosters confidence in the Swiss Franc as a reliable currency for international transactions and funding.
- Liquidity in Financial Markets: CHF enjoys deep liquidity in global forex markets, making it easy for borrowers to access funding in Swiss Francs without facing significant transaction costs or market distortions.
How CHF is Used in Global Finance
The use of CHF as a funding currency manifests in several key areas:
- Carry Trades: Investors borrow in CHF at low-interest rates and invest in higher-yielding assets denominated in currencies such as USD, EUR, or emerging market currencies. The profit comes from the interest rate differential, although carry trades involve currency risk.
- Corporate and Sovereign Borrowing: Multinational corporations and sovereign entities issue CHF-denominated bonds to take advantage of lower borrowing costs.
- Hedge Fund and Institutional Strategies: Hedge funds and institutional investors use CHF-denominated leverage in structured products, derivatives, and arbitrage strategies to optimize returns while managing risk.
Risks and Challenges of Using CHF as a Funding Currency
Despite its advantages, there are notable risks associated with funding in CHF:
- Currency Appreciation Risk: A sudden appreciation of the Swiss Franc can significantly increase the cost of servicing CHF-denominated debt, particularly for borrowers with earnings in other currencies.
- SNB Policy Shifts: The Swiss National Bank actively intervenes in forex markets to prevent excessive appreciation of CHF. Unexpected policy changes can impact borrowers and traders using CHF as a funding currency. Recently, the SNB has been increasingly threatening to return to negative interest rates, reinforcing CHF’s position as an attractive funding currency.
- Market Liquidity Risks: In extreme market conditions, liquidity in CHF markets can tighten, making it difficult for borrowers to roll over funding or exit positions without significant costs.
Conclusion
CHF’s role as a funding currency is underpinned by low interest rates, financial stability, and its status as a safe-haven currency. However, market participants must remain vigilant about the risks associated with currency fluctuations and SNB policy decisions. With the BOJ hiking rates in 2025 and the SNB signalling potential negative rates, CHF stands out as a compelling funding currency choice for investors.
As global financial markets evolve, the role of CHF as a funding currency will continue to be influenced by macroeconomic trends, interest rate differentials, and investor sentiment. For investors, businesses, and policymakers, understanding the dynamics of CHF funding is crucial in navigating global financial markets effectively. Whether for carry trades, corporate finance, or hedging strategies, CHF remains a key player in the international funding landscape.
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