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Investing.com - The Swiss franc (CHF) has emerged as the second-best performing G10 currency year-to-date on a spot basis, despite offering virtually no carry, according to a new UBS report. The CHF has posted an impressive 13% gain against the USD this year, even amid the recent rebound in the US dollar.
Switzerland currently faces potential tariffs of up to 39% as it has not secured a trade deal with the US, which could increase disinflationary forces in the country and potentially lead to further rate cuts by the Swiss National Bank (SNB). UBS expects a US-Swiss trade deal to eventually be signed in its base case scenario, reducing this risk.
The SNB is likely to prevent further excessive CHF strength in the near term, according to the report. Over the medium term, UBS expects the EUR/CHF pair to move sideways with potential to approach 0.94 as policy uncertainty diminishes, while USD/CHF still has room to decline toward 0.76 into next year.
UBS views current levels as an opportunity for investors to gain exposure to Scandinavian currencies or the Australian dollar, both of which are expected to outperform the CHF in the second half of the year in terms of spot and carry. The firm expects GBP/CHF to remain stable, with the strong yield advantage leading to a decent carry return in GBP.
Given the current low option volatility backdrop in key CHF pairs, UBS recommends selling volatility more selectively, specifically selling the upside in CHF/NOK. For Japanese yen exposure, the firm suggests waiting until there is a clearer signal from the Bank of Japan on higher Japanese interest rates.
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