BofA Predicts Renewed Weakness in CHF and Advocates Cautious Risk Management
On Monday, BofA Securities Global Research shared its views on the Swiss Franc (CHF), indicating a potential weakening against other currencies. The firm acknowledged that it maintains a medium-term negative stance on the CHF, noting that the second half of the year poses challenges. The macroeconomic rationale for a weakening of the CHF is supported by volatility pullbacks that enhance the carry trade framework. However, risks such as tariffs and European politics require careful risk management.
Throughout the year, the CHF has shown stability against the USD and GBP, which BofA prefers to express a lower CHF position. The Swiss National Bank (SNB) became the first major central bank to cut interest rates and set a conservative year-end target of 1.00 for EUR/CHF. Despite geopolitical events and yield compression affecting the currency's performance, the CHF has depreciated by approximately 4% against the USD since the beginning of the year, with most of this underperformance concentrated in the first half.
The performance of the CHF in the second half sharply contrasts with the first half and is second only to the Japanese Yen (JPY) in terms of decline. BofA notes that yield compression is a significant factor in the relative outperformance of the CHF and JPY. The CHF is unique among G10 currencies due to its natural risk-off hedge role, particularly sensitive to geopolitical risks close to Switzerland.
The CHF's sensitivity to geopolitical concerns was emphasized during a significant rally amid the French political crisis in June. Although stable on a trade-weighted basis since September, it still serves as a strong risk-off hedge against broader global themes. BofA suggests that as the U.S. presidential elections conclude and market focus returns to fundamentals, there is a macro argument for expectations of CHF weakness toward the end of the year.
BofA's analysis indicates that high FX volatility has caused a divergence between Swiss interest rate spreads and FX performance. The firm expects the SNB to continue cutting interest rates, which may accelerate the cycle if the real effective exchange rate (REER) remains high. However, BofA advises caution due to the potential for geopolitical disruptions that could affect the CHF's trajectory, particularly in Europe.