Newsletter · · Ashutosh Agarwal

The Whole World Is Short the Swiss Franc - G10 FX Weekly - Week of August 31, 2026

G10 FX Weekly for the week of August 31, 2026. Podcast synthesis on how currency desks moved their stress test from the asset side of the carry trade to the funding side, J.P. Morgan's line that everyone and their mother is funded out of Swiss francs, the fiscal scale trap that stops the SNB fighting franc strength, and why this unwind did a tenth of August 2024's damage.

G10 FX Weekly

Week of August 31, 2026: The Whole World Is Short the Swiss Franc

For weeks, this newsletter has been consumed by the American drama: an activist Treasury buying its own bonds, a new Fed chair who refuses to tell anyone what he's thinking, a dollar sliding to three-month lows. All of that still matters. But underneath the noise, the people who actually run currency books for a living have quietly shifted what keeps them up at night, and it's worth stepping back to see it clearly.

Here is the shift, in one sentence. For most of this year the big worry about the "carry trade" was whether the things you buy with it could survive. Now the worry has moved to the thing you borrow to fund it. And almost everyone is borrowing the same currency: the Swiss franc.

Quick definition, because the whole issue turns on it. A carry trade is simple: you borrow a currency that pays almost nothing (a "funding currency") and use the money to buy a currency that pays a lot (a "high-yielder"). You pocket the difference in interest rates. The two favourite things to borrow are the Japanese yen and the Swiss franc, because both have rock-bottom interest rates. When too many people crowd into the same trade, an unwind can be violent, which is exactly what happened in August 2024. So when the pros start eyeing the funding side nervously, pay attention.

TL;DR

  • The stress test flipped. J.P. Morgan's FX desk says clients used to grill them on the asset side of carry, could emerging-market currencies and stocks survive rising US yields? After the Treasury's surprise bond-buyback, the questions moved to the financing side: are the Swiss franc and yen safe to be short? (At Any Rate, Aug 21).
  • "Everyone and their mother is funded out of Swiss franc." That line, from J.P. Morgan strategist James Nelligan, is the whole story. The crowding is real, and it makes the franc a coiled spring.
  • The franc is trapped by design. Economist Gianluca Benigno lays out why Switzerland's central bank can't easily stop the franc rising: its balance sheet is a giant pile of foreign currency (~$759bn of ~$894bn in assets) that loses value every time the franc goes up, a "fiscal scale trap." (Macro Musings, Aug 10).
  • Carry is still winning, for now. Despite a "toxic mix" of shocks, J.P. Morgan's carry baskets are up 11% (real) and 7% (risk-adjusted) year to date, and the recent yen intervention caused a fraction of the 2024 damage: a 1% to 2% dip versus 7% plus two years ago (At Any Rate, Aug 7).
  • The dollar bear case has one missing ingredient. J.P. Morgan's Meera Chandan: a real, lasting dollar drop needs the Fed's expected peak rate to fall, and it hasn't. The market still prices hikes.
  • The clean dollar bull: BMO's Mark McCormick calls it "prime time for the dollar," targets a stronger dollar into a Fed hiking second half, and pegs Japan's intervention line at ¥165 (Bloomberg Surveillance, Aug 18).
  • Euro and sterling: an inflation, not a crisis, story. Eurozone inflation is being held down by ECB credibility while UK inflation runs hotter than the Bank of England admits. J.P. Morgan sees UK CPI peaking near 3.4% early next year, gas already at 149 pence a therm (At Any Rate, Aug 14).

What's new

1. The professionals just moved their worry from what you buy to what you borrow

The sharpest read of the moment came from J.P. Morgan's global FX team, Arindam Sandilea, Meera Chandan, Patrick Locke and James Nelligan, on their "Debate Corner 2.0" podcast, At Any Rate (Aug 21). Sandilea described the shift in what clients are anxious about, and it's the single most useful sentence for anyone with a currency position right now:

Prior to this week's treasury actions, the stress testing was mostly along the asset side of the carry trade… will these high yielding EMs be able to withstand this inexorable rise in the long end of the treasury curve? And right after the treasury's buyback announcement, the stress testing went to the other side, the financing side… some of these concerns center on… Swiss and yen and their vulnerability.

In plain terms: for months, the fear was that the stuff you buy in a carry trade (emerging-market currencies, stocks) would crack under rising US bond yields. Now the fear is that the stuff you borrow, the franc and the yen, could suddenly spike, torching everyone who's short them at the same time.

Why it matters: a funding currency that everyone is short is dry tinder. It doesn't need good news to rally, it just needs a spark that makes the crowd rush for the exit at once. That's the mechanism behind every carry-trade blowup.

2. "Everyone and their mother is funded out of Swiss franc"

Nelligan, who runs J.P. Morgan's European currency views, delivered the line of the week when asked whether his long-running bet against the franc still made sense:

the Swiss franc [is] in much more than normal spotlight these days, because it looks like everyone and their mother is funded out of Swiss franc for their carry trades.

He's not backing off the bet. He still thinks the franc falls against higher-yielding, growth-sensitive currencies, and notes the franc looks "a little bit on the rich side," with J.P. Morgan's fair value for euro/franc down around 0.9250 (i.e. the euro should buy more francs than it does). But he's candid that the crowding raises the risk. The same podcast flagged the offsets keeping him short: rising energy prices help the currencies he prefers to own, and any fresh yen intervention would push even more funding into the franc, adding fuel to the crowding.

The tell is where his conviction went up: the Swedish krona. Nelligan said his bearish view on the krona as a second funding currency "definitely went up this week," because Sweden's central bank keeps pushing back on rate-hike bets while core inflation sits well below 1%, so the krona stays a cheap thing to borrow.

3. Why the franc is a trap the Swiss can't easily escape

Here's the part that makes the crowding genuinely dangerous: Switzerland's central bank is structurally limited in how hard it can fight a rising franc. Economist Gianluca Benigno, who writes the "Central Bank Watcher" newsletter, explained the mechanics on Macro Musings (Aug 10), and it's the clearest account of the Swiss problem I've heard.

The Swiss National Bank's balance sheet is not like the Fed's. Almost all of it, roughly $759bn out of $894bn in assets as of April, is foreign currency, mostly euros and dollars (it even owns US stocks like Apple). But everything it owes is in francs. That mismatch is the whole problem:

when the Swiss francs appreciate, they tend to worsen the value of the asset side of the Swiss national bank balance sheet.

So every time the franc rises, the SNB's giant euro-and-dollar pile is worth fewer francs, and it books losses. Benigno calls this the "fiscal scale trap": the bigger the balance sheet grows, the more a rising franc hurts, and those losses flow through to Switzerland's regions and federal government, which rely on the SNB's annual profit transfers (roughly CHF 4bn last year, but zero in 2022 and 2023).

And the franc keeps wanting to rise, because, as Benigno put it, it "becomes very attractive, especially in a situation of high uncertainty or geopolitical tensions," of which there is no shortage. A stronger franc also drags Swiss inflation down; it's already "flirting with 0%." The read-through: the SNB has every reason to lean against franc strength, but the very act of doing so bloats the trap. That's why the market keeps testing it, and why a crowded short is playing with fire.

4. The good news for carry: 2026 is not 2024

Before anyone panics, the same J.P. Morgan desk supplied the reassuring counterweight, and it's grounded in hard numbers. On the Aug 7 At Any Rate, carry specialist Antonin Delair compared the recent yen intervention to the infamous August 2024 unwind, and the difference is stark:

following last week, you were down 1.2% to 2% on global baskets… In 2024, the last 2 weeks of July to beginning of August, you are down 7% on those same baskets… double digit… and all that with equities selling off at the exact same time.

This time, he said, the yen's move was "a lot more idiosyncratic," with the franc and Latin American currencies holding up. Even through what he called a "toxic mix" (the Nasdaq down 11% intraweek, oil tumbling from $100 to $80, the intervention itself, and a weak US jobs report) the baskets fell only about 1%. And the year has been good: J.P. Morgan's real carry basket is up 11% for 2026, the risk-adjusted version up 7%.

But Delair put his finger on the one thing that could change the story, and it's the same funding worry: concentration. Borrowing in yen is limited (intervention risk), and borrowing in dollars is limited (US yields near 4%). That leaves the euro and the franc carrying the load:

that leaves question around what is the size of the euro funding… and it's also quite short on your positioning metrics. So maybe something to watch there with… the funding in Swiss as well.

Translation: if the market is leaning too heavily on the euro and the franc to fund everything, those are the currencies that snap back hardest if sentiment turns.

The debate

This is a genuine two-sided fight, and both sides came from serious desks.

The dollar keeps leaking and carry keeps paying. The J.P. Morgan team leans mildly this way but refuses to chase it. Locke put the buyback in perspective, "it's like 14 billion effectively in the buybacks this quarter compared to the… 32 trillion dollar treasury market," and noted that every recent Treasury move (yen intervention, the Japan backstop facility, the issuance guidance, the buyback) skews "neutral to dollar negative." Add a good year for carry and firm energy prices, and the pressure stays gently against the dollar. Sandilea summed up the house view with a wink at the Fed chair's own catchphrase: the desk is "thoughtfully… watchfully thinking about the dollar."

Don't get carried away, the dollar bear case is missing its key ingredient. The best pushback came from within the same team. Meera Chandan argued that comparisons to the 2025 "sell America" episode are misplaced, because the Fed is in a completely different setting now. The market still prices hikes, roughly 35 to 37 basis points of them (a basis point is one-hundredth of a percent), with no easing bias. Her bottom line:

for this to move substantially beyond what we've seen already, a necessary condition is that the Fed terminal rate needs to come off.

In other words, the dollar can't truly break down until the market starts expecting the Fed's peak rate to fall, and right now it's doing the opposite.

The clean dollar bull. For the fully opposing view, Mark McCormick, chief FX strategist at BMO Capital Markets, on Bloomberg Surveillance (Aug 18), was unequivocal: "This is kind of prime time for the dollar." He reads the recent weakness as a positioning shakeout and a "re-embrace" of risk, not a rates story, and expects "a rekindling of pickup in U.S. growth, Fed hikes for [the] second half and a stronger dollar," targeting the dollar index at 103 (though he calls that the peak for this quarter). Notably, he doesn't think the yen intervention will hold: Japan is fighting an energy-import shock, so intervention is "a Band-Aid… trying to buy time."

Trades in play

Woven from what the desks actually said, ranked by usefulness for a book:

  • The crowded short: funding in Swiss francs and Swedish krona. J.P. Morgan's highest-conviction expression is not a blunt short-franc bet, it's borrowing francs (and krona) to buy higher-yielding, growth-sensitive currencies. Nelligan's nuance matters: express it against cyclical currencies, not as a naked short, so you're "hedging out some of the Iran conflict risk." The danger is the crowding itself; size it knowing the exit is narrow.
  • The high-yielders they'd own: the Australian dollar and Norwegian krone. Both are top J.P. Morgan picks: strong global growth, firm commodity and energy prices, and (for the krone) a possible Norwegian central-bank hike in September. Nelligan called the krone "an energy currency that's very difficult to short." Locke added the Colombian peso on the emerging-market side.
  • Long yen into the Bank of Japan, but respect ¥165. McCormick pegged the intervention line precisely: "They just did it last time at 164. They're right on 165… that's kind of their number." A long-yen view has a catalyst (a hawkish Bank of Japan; J.P. Morgan now expects three hikes next year), but if US growth reaccelerates, McCormick sees ¥165 to ¥170 in play. This is the tug-of-war to watch.
  • The debasement hedge underneath it all. The desks kept coming back to the rally in gold and Bitcoin as the market's real "short dollar, distrust the plumbing" expression, the pressure valve when currencies themselves stay rangebound.

Read-throughs

  • Euro/franc and the crowding. J.P. Morgan's fair value near 0.9250, with Nelligan saying he "wouldn't be surprised to see" the euro climb toward 0.94 against the franc (i.e. the franc weakening) is the desk's central expression. The whole issue hinges on whether the crowd can hold that short.
  • The euro's own story is quiet strength through credibility. On the Aug 14 At Any Rate, J.P. Morgan's rates team noted eurozone inflation ticked up (headline 2.9%, core 2.5% in July) but medium-term expectations "remain firmly anchored by ECB credibility," the opposite of the US, where trust is fraying. That divergence quietly supports the euro even as energy risks (Brent near $90, the drying Rhine lifting freight costs) bubble underneath.
  • Sterling: hotter inflation than the Bank admits. The same podcast sees UK CPI peaking near 3.4% in early 2027 and RPI near 5% late this year, with UK natural gas already at 149 pence a therm, running about half a point above what the Bank of England's own forecast implies. The gap says the Bank may be underestimating the inflation grind, which is slow-burn supportive for the pound rather than crisis-driven.
  • The August 2024 memory. Delair's numbers are the reassurance and the warning in one: this unwind was a tenth the size of two years ago because the Bank of Japan didn't hike into it and equities didn't crack. Both of those could change, and a surprise hike plus a risk wobble is the recipe that turns a 1% dip into a 7% one.

What changed

The center of gravity moved. For weeks the FX conversation was downstream of Washington: the buyback, the Fed chair, the dollar's slide. This week the desks that trade currencies for a living re-centered on the mechanics of the carry trade itself, and specifically on its foundations, the yen and, above all, the franc. The reassuring news is that the last intervention did a fraction of 2024's damage and carry is still up double digits on the year. The unsettling news is that the reason it's crowded, everyone funding in the same two currencies, is also the reason the next shock could be sharp. The franc is the one to watch, precisely because everyone is on the same side of it.