Why? Well, today Japan cut its growth forecast for the current fiscal year (April '07 - March '08) from 2.1% to 1.3%, and there seems to be talk of a recession happening also. Today's Lex column in the FT is pretty pessimistic.
Now I'm no expert on Japan, but over a decade and a half of failing to kickstart its economy, continued deflation, interest rates at 0.5% yet no stimulation happening, equity prices down over 60% from their peak in 1990, and land prices falling for 16 years in a row, does not inspire one to invest in that economy. I think this downgrade of is GDP forecast is a green light to get back into the carry trade.
Now, what to position it against though? Whilst I do think the US Dollar is due a rally, the economy is still a mess and looks set to worsen. The UK looks like it's set to follow, and the Euro is definitely over-valued after far too big a rally this year, and the Aussie/Kiwi I have no view on (although just glancing at it for this post, the entry levels look attractive and the carry is pretty huge...I'll come back to this later).
So given the options, I think the Swiss Franc is fundamentally the right currency to be long. We are in a period of great uncertainty, the Swiss Central Bank are apparently considering raising rates again from their current target level of (I think) 2.25 - 3.25%. With Euro rates at 4%, and fundamentally they should be higher as the ECB needs to slow down money supply, I think this could also drag Swiss rates up. So with rising rates, it should be used less as a carry currency going forward.
Also, Switzerland is the 4th largest holder of gold, which is good news for those who aren't fans of fiat currencies. (See here for a nice overview).
1y Chart of CHFJPY
In terms of carry, it's worth about 50 cents per 3 months.
Spot is trading ~98.00, I am buying a Jun '08 contract at 97.17, with an exposure of $600 per big figure.
And I am going to have a good think about putting the same trade on against AUDJPY and NZDJPY.
(Admin note: I'm going to put just the spot price in the spreadsheet, so will put the equivalent spot level of 98.07 in. Will correctly account for P+L/Carry etc when trade unwound)