The Carry Trade strategy is widely known and used, especially among institutional investors. It consists of borrowing in a currency with low interest rates to invest in products denominated in currencies with higher yields. For example, a global investment firm could finance itself by issuing 10 year Yen denominated bonds at 0.70%, exchange the currency and invest in 10 year Italian bonds at 4.35% or in a Pharmaceutical US stock with a 6% dividend yield. It is quite a cautious strategy that works thanks to different cash flows. Another interesting point is that the currency being sold – which has a low interest rate – also has fundamentals that tend to make it depreciate against the counterpart, thus also resulting in the possibility of outright capital gains.
CHF and JPY have historically been currencies with the right characteristics for this purpose: a robust and confident economy, low interest rates compared to other advanced economies, and a sufficiently large financing market. What usually happens is that in times of risk-on, with stock markets (but also commodity or bond markets lately) on the rise, investors sell suitable currencies to put their money to work on riskier assets: when market confidence…
