Analysts at Bank of America (BofA) have raised questions about the sustainability of the recent decline in the Swiss Franc (CHF). While many investors are shorting the CHF due to expectations of policy divergence, BofA argues that the currency’s current weakness might not persist for long.
The Swiss Franc remains near the levels it traded at early in 2024, reflecting its continued overvaluation. The Swiss National Bank (SNB) has signaled the potential for interest rate cuts, which could even return to negative territory. However, BofA believes the SNB is hesitant to fully reintroduce unconventional monetary policies.
The analysts are particularly skeptical about the effectiveness of future policy adjustments if the SNB’s rate reaches what they see as a terminal level of 0.25%. Tools such as forward guidance and foreign exchange interventions may be utilized, but historical trends suggest their impact could be limited.
Another factor influencing the CHF is the upcoming German elections, which add to uncertainty in the European political environment. BofA notes a strong connection between Euro volatility and the Swiss Franc, with recent months showing a heightened Euro volatility premium. This could create additional turbulence for the CHF in the near term.
While BofA continues to recommend a core short position on the CHF, they also advise investors to consider hedging against potential risks. One suggested strategy involves using wing structures, which could help manage the expected rise in volatility ahead of the German elections.
The interplay between the SNB’s cautious stance on unconventional measures and the broader European political landscape makes for a challenging outlook for the Swiss Franc in 2025.
