BofA Securities analysts have highlighted the Swiss National Bank's (SNB) recent intervention in the foreign exchange markets, which aimed to weaken the Swiss franc (CHF) amidst significant market turmoil.
BofA anticipates further CHF depreciation, as the Real Effective Exchange Rate (REER) has largely recovered from its year-to-date decline, maintaining pressure on the SNB to loosen monetary conditions.
The SNB's action, which took place last week, represented the second largest intervention flow of the year. "FX intervention continues to
underpin the SNB’s dual strategy on monetary policy, a combination of rate changes and FX sales to achieve its inflation target," said BofA analysts.
During the first half of 2024, the strong demand for carry trades seemed unstoppable, with the G10 foreign exchange league table reflecting this trend. However, by the end of July, the EUR/CHF pair had reversed all its gains made since the start of the year.
The SNB's response to these sharp and volatile currency movements has been substantial, as evidenced by the recent surge in sight deposits, marking the second largest increase since April amid rising Middle-East tensions and the fourth largest since 2023.
The CHF's recent rally, which saw a recoup of most of its losses from earlier in 2024, triggered the SNB's rate cut decision on June 20th. The bank's analysts suggest that the REER's performance will likely influence the SNB's policy decisions at the upcoming September meeting.
The beginning of this week has seen some reversal in the CHF's recent gains, and BofA's analysis suggests a direction bias towards further weakening of the CHF against currencies like the Australian dollar (AUD) and the British pound (GBP).
These currency pairs are viewed as clear indicators of a potential mean-reversion in trading volume. Additionally, BofA points to potential gains in EUR/CHF and USD/CHF pairings as more defensive positions for a weaker CHF.
"Our final word is to remind readers that the relative fundamental outlook
between Switzerland and its peers has not changed. Positioning has been the main driver which we think makes CHF shorts attractive once more," added BofA.
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