On Monday (NASDAQ:MNDY), BofA Securities Global Research provided insights into the Swiss Franc (CHF), indicating a potential for renewed weakness against other currencies.
The firm acknowledges that while they have maintained a medium-term bearish stance on the CHF, the second half of the year presented challenges. The macroeconomic case for a weaker CHF is supported by volatility retracement, which enhances the carry trade framework. However, risks such as tariffs and European politics require careful risk management.
Throughout the year, the CHF has shown stability, especially against the USD and GBP, which BofA favors for expressing a lower CHF. The Swiss National Bank (SNB) was the first major central bank to cut rates, leading to a conservative year-end target of 1.00 in EUR/CHF. Despite geopolitical events and yield compression affecting the currency's performance, the CHF has seen nearly a 4% decline against the USD year-to-date, with most of this underperformance concentrated in the first half of the year.
The CHF's performance in the latter half of the year contrasts sharply with the first half, outperformed only by the Japanese Yen (JPY). BofA notes that yield compression has been a significant factor in the CHF's and JPY's relative outperformance. The CHF is unique among G10 currencies due to its role as a natural risk-off hedge, sensitive to geopolitical risks, particularly those close to Switzerland.
The CHF's sensitivity to geopolitical concerns was highlighted by its significant rally during the French political crisis in June. While the CHF has been stable on a trade-weighted basis since September, it still serves as a strong risk-off hedge against broader global themes. BofA suggests that with the US Presidential elections over and market focus returning to fundamentals, there is a macro argument for expecting CHF weakness towards the end of the year.
BofA's analysis indicates that elevated FX volatility has caused a divergence between Swiss rate spreads and FX performance. The firm expects the SNB to continue easing rates, potentially accelerating the cycle if the real effective exchange rate (REER) remains high. However, BofA advises caution due to the potential for geopolitical disruptions, particularly in Europe, which could affect the CHF's trajectory.
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