Carry Trades Funded in Yen, Swiss Franc Regaining Profitability, UBS Says

Carry trades funded in the yen and Swiss franc are becoming profitable as borrowing costs rise in Europe and Canada, according to UBS AG.

As central banks resume boosting interest rates, investors should start thinking about borrowing in the Japanese and Swiss currencies to buy the Swedish krona, the Norwegian krone, the euro and the Canadian dollar, according to Chris Walker, a foreign-exchange strategist at UBS in London.

“We favor more upsides in the carry of the Norwegian krone and even the euro just because the potential move in yields across the curve is going to be bigger because they’re coming from a lower base,” Walker said in a phone interview.

In carry trades, investors borrow where interest rates are low and invest where returns are higher. Rapid swings in exchange rates tend to erode the carry trade’s profits. Investors should wait until turmoil in the Middle East and North Africa ebbs before pursuing the carry trade, Walker said.

Borrowing in yen and selling it to buy the krone, krona, the Canadian dollar and the euro has returned 33 percent this year. The same trade, funded by the franc, has returned 17 percent. The carry trade lost 11 percent last year for the yen and 7.6 percent for the franc.

The European Central Bank will raise its main refinancing rate 25 basis points, or 0.25 percentage point, to 1.25 percent in the fourth quarter, according to the average forecast in a Bloomberg News survey of 18 economists.

Rate Outlooks

Canada’s and Norway’s central banks will increase their rates 25 basis points in the second quarter, according to the average forecasts in separate Bloomberg News surveys. Sweden’s Riksbank, which has boosted borrowing costs five times since the beginning of July, predicted last week that it will raise its rate by a quarter-percentage point four more times this year.

Japan’s benchmark interest rate has been held at zero to 0.1 percent since October 2010, compared with 0.5 percent in 2007 and 2008. The Swiss National Bank has kept its rate at 0.25 percent since March 2009.

The yen appreciated 1 percent to 81.69 per dollar at 1:55 p.m. in New York. The franc advanced 0.8 percent to 92.59 centimes versus the greenback after strengthening to the record of 92.34 centimes.

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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