“Hope springs eternal in the human breast.”
— Alexander Pope, An Essay on Man
The CHF could become the main (only) target as funding currency for the global carry trade.
Equity markets continue their summer recess - is volatility to come back with a vengeance ahead of the US midterm elections?
Bond vigilantes will have their eyes on the CPI this week and the Fed next week.
The long commodity trade is alive and kicking. Stay committed.
From Wikipedia:
What does this have to do with anything relevant to financial markets?
Not a lot.
But still, what a good way to start talking about the Swiss Franc, which now seems to be, de facto, the last funding currency standing in G10-land.
This, mainly since the Treasury has decided, supported by the Bank of Japan (BoJ) / Ministry of Finance (MoF), that the Japanese Yen (JPY) had weakened enough now. And yes, my tongue is firmly out of my cheek here when writing WHO decided.
With this first Yen-related “You Shall Not Pass” on July 31st, soon followed by a second one for Treasury yields on August 19th, markets may reasonably assume that further material JPY weakness will be resisted, “whatever it takes”. And that rather spoils the economics of that oh-so-wonderful carry trade, which as a reminder, borrows in a low-yielding currency, sells it and invests the proceeds in a higher-yielding one. The Japanese Yen - Mexican Peso is (was?) a classical example of that carry trade:
That’s a nearly 3-fold increase in just a bit more than six years!
Hell! It even beats the S&P 500 buy-and-hold return by very wide margin over the past five years:
One feature of the carry trade is, of course, that the “borrowing currency” loses in value (helped by the sales out of the carry trade), or, at a minimum does not appreciate, which would curtail total return.
And hence, since the Treasury yelled their “Yen shall not pass”, this near-mechanic JPY depreciation has been put at risk. After all, we know that central banks can really get their way if they insist enough:
So, with the BoJ finally signalling a higher policy rate on accelerating inflation,
and Switzerland now ‘providing’ by far the cheapest money, courtesy super-easy monetary policy,
the CHF could indeed be the last funding currency standing.
Even better, the CHF is sooooo hopelessly overvalued, which surely will be useful too:
And the Swiss National Bank (SNB) is not expected to hike until mid next year (earliest!), despite some recent upside inflation surprises:
But never forget, hope does indeed spring eternal. Especially, it seems, among those betting against the Swiss Franc. Shorting the CHF has been something of a widowmaker trade over the years
— repeatedly declared overvalued, repeatedly expected to weaken, and repeatedly finding new and imaginative ways of making its detractors look rather silly.
So do we fund in CHF or don’t we?
The CHF has perhaps never looked more attractive as a funding currency — precisely when history tells you that treating CHF weakness as a structural inevitability is extraordinarily dangerous.
Let’s have a look at some other markets now …
Starting with stock markets, we wrote in a The Daily Q edition (02.09.2026 - click here) last week that (equity) markets seemed to be on the brink of breaking down. Here’s the chart of the S&P 500 mini-futures contract:
Well … saved by the bell, so to say! Or Back from the Brink, to follow last week’s thought train.
The index held, for now at least, exactly where it had to, using resistance-turned-support (dashed line) and the 50-day moving average (blueish line) for a bounce.
But follow-through via a new all-time high (ATH), less than one and a half percent away, is needed to keep the bullish argument alive.
Plus an improvement in market breadth, for example via a reacceleration of the advance-decline ratio (red line) on the NYSE would be very helpful too:
The Nasdaq-100 has been a bit of a laggard, but recent support held and the 50-day moving average has been reclaimed:
Though before we get too excited, let’s remember that we are in a US midterm election year and volatility should be picking up right about now:
But it is also fair to say that increased volatility is not necessarily equal to lower equity prices:
In any case it seems that Q4 could be positive for equity returns and in the best case, we may get an opportunity over the next month and a half to pick up those equities at a lower price…
European equities (SXXP) are tagging along the (upward-sloping) 50-day moving average:
In Asia, the Nikkei 225 continues to consolidate within a wide triangle, and may need some more time before establishing a new trend:
Though admittedly, the broader TOPIX index in the same country could be on the verge of a retest to the upside:
Your overweight India trade is not working for now. Neither on an absolute,
nor really from a relative basis:
Nevertheless, it continues to be our working assumption that we are just in a huge, massive digestion period post the massive rally starting in 2020. If true, a resumption of the uptrend should happen in the first half of next year latest:
One emerging market that has suddenly started working well again is Brazil, with the iShares MSCI Brazil ETF (red line) up 15% as the odds for a Bolsonaro win have been increasing:
Turning to fixed income markets, last week’s strong non-farm payroll number did not have an impact of relevance on the US 10-year Treasury yield:
Not even rate hike odds deducted from futures market reacted in a meaningful manner:
So, all the pressure now turns on Warsh the CPI number due later this week:
But, I do not think anybody seriously expects the FOMC to hike this month (or at all before the mid-term election, a period that also includes the 28/10 FOMC meeting).
It is therefore well possible that the bond vigilantes will respond to a no-hike with further upside pressure on yields …
Which in turn could mean the US Dollar may continue to weaken again. Here’s the US Dollar index, suffering under selling pressure over the past few sessions:
But for once, the $ weakness in the DXY is not stemming mostly from the Euro, but rather the Japanese Yen:
As mentioned in the intro to this week’s letter, something possibly has changed in the collective perception towards the JPY of global FX-investors.
Hence, the formula of: Positive view on JPY + CHF only funding currency = Sell CHF/JPY:
A move in excess of six percent in only a few months is massive for currencies, so definitely something seems to be going on.
HOWEVER, before you all rush into selling the Swissy and buying the Ninja, remember that this trade was the widowmaker for decades!
Finally, turning into the commodity complex for a moment, we think it is worth putting a toe or two back into Gold:
Also continue to hold on to your Copper,
or Copper Miner (COPX) position:
We are only at the beginning of this trend …
Also, it seems the US has gone into a “who blinks first” contest with Iran by applying now more of an economic strangle on the country, rather than outright throwing rockets at them (of which they may have few left anyway…). This is of course a contest where the US will have the longer breath, but it will not come without a cost. Hence, the price of crude will likely remain “higher for longer”:
We are living through extremely interesting macro times, where equities have moved to becoming somewhat of a sideshow - at least for the time being. However, if further strong advances fail to come through, I wonder what is going to happen to the wealth effect - especially in the US.
But that is a theme for another week. For now, let’s focus on where the action is happening and that seems to be mainly interest rates and currency markets.
Stay tuned and may the trend be with you!
André
Everything in this document is for educational purposes only (FEPO)
Nothing in this document should be considered investment advice
Investing real money can be costly; don’t do stupid shit
Leave politics at the door—markets don’t care.
Past performance is hopefully no indication of future performance
The views expressed in this document may differ from the views published by NPB Neue Privat Bank AG