Insights on the Swiss Franc (CHF) by BofA Securities

On Monday (NASDAQ:MNDY), BofA Securities Global Research provided insights into the Swiss Franc (CHF), indicating potential renewed weakness against other currencies.

The firm maintains a medium-term bearish stance on the CHF, noting that the second half of the year presents challenges. The macroeconomic case for a weaker CHF is supported by volatility retracement, enhancing the carry trade framework. However, risks such as tariffs and European politics necessitate 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 impacting performance, the CHF has seen nearly a 4% decline against the USD year-to-date, primarily concentrated in the first half.

The CHF's performance in the latter half contrasts sharply with the first, being outperformed only by the Japanese Yen (JPY). BofA notes that yield compression significantly influenced the CHF and JPY's relative outperformance. The CHF is unique among G10 currencies, acting as a natural risk-off hedge sensitive to geopolitical risks close to Switzerland.

The CHF's geopolitical sensitivity was evident during the French political crisis in June, where it rallied significantly. Although stable on a trade-weighted basis since September, it remains a strong risk-off hedge against broader global themes. BofA suggests that with the US Presidential elections concluded and market focus shifting back to fundamentals, there is a macro argument for anticipating CHF weakness towards year's end.

BofA's analysis reveals that elevated FX volatility has caused 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 potential geopolitical disruptions in Europe affecting the CHF's trajectory.

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