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Bank of America (BofA) analysts maintained a bearish outlook on the Swiss Franc (CHF), despite a lack of conviction in the market for a sustained depreciation of the currency. They highlighted several factors that have traditionally been expected to weaken the CHF, such as policy divergence and decreasing inflationary pressures in Switzerland.
However, the CHF has remained resilient due to rising volatility premiums and geopolitical concerns. The analysts at BofA pointed out that balance of payments (BoP) dynamics might be the key to unlocking a more pronounced downward trend for the CHF. They noted that while the risks are evident, they believe that 2025 could see a trend depreciation of the currency.
BofA also discussed the Swiss Franc’s correlation with gold, as Switzerland is the world’s largest gold refiner. They observed that gold prices have soared, driven not only by risk-off movements but also by central bank demand, contributing to a stronger CHF.
The first half of 2024 has provided insights into how CHF could weaken through the BoP channel. BofA drew parallels with Japan’s experience of structural capital outflows leading to a weaker Yen. They noted that Switzerland has recorded four consecutive quarterly basic balance deficits, which bolsters their conviction that CHF weakness could be more enduring in 2025.
In terms of trading and hedging strategies, BofA suggested that the policy divergence theme is still in play, particularly with a strong correlation to the US 10-year yields, which are forecasted to reach 4.75% by year-end. They proposed that CHF buyers could consider reducing hedges, while CHF sellers might find it advantageous to lock into longer-term hedges, especially as the Swiss National Bank (SNB) might continue to ease its policies, potentially below zero, and as US yields are expected to rise further.
The report concluded with a note of caution regarding positioning risks, particularly among hedge funds and asset managers in futures. Nevertheless, BofA’s proprietary flow data indicates a net demand for the CHF over the past year.
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