BofA Predicts CHF Weakness Won't Be Sustainable by 2025

Bank of America (BofA) analysts have expressed concerns about the sustainability of the recent decline of the Swiss Franc (CHF). While there is a prevalent short-selling trend among investors based on policy differential themes, BofA suggests that the current weakness of the currency may not last long.

The Swiss Franc is currently trading close to levels seen at the beginning of 2024, indicating that its overvaluation has largely been maintained. The Swiss National Bank (SNB) has hinted at the possibility of interest rate cuts, potentially returning to negative territory. However, BofA feels that the SNB is hesitant to adopt unusual policy measures again.

Analysts question the effectiveness of potential future policy measures when the policy interest rate reaches what BofA perceives as the terminal rate of 0.25%. The SNB could rely on forward guidance and currency interventions, but past experiences suggest that these tools may have limited impact.

The upcoming political landscape in Europe and the looming elections in Germany add to the complexity. Analysts note a strong correlation between euro volatility premium and CHF, particularly evident in recent months. The high level of euro volatility is a concern as it may influence the movements of the Swiss Franc.

Although BofA's forecasts suggest maintaining a fundamental short position on the CHF, they advise investors to consider hedging strategies. Specifically, they recommend using wing structures to hedge against potential risks associated with anticipated volatility increases ahead of the German elections.

The SNB's reluctance to engage in unusual policy measures and the potential impact of political risks in Europe on currency volatility presents a complex backdrop for the CHF.