Investing.com – Analysts at Bank of America (BofA) have raised concerns about the sustainability of the recent decline in the Swiss franc (CHF). Despite the general trend among investors to short the Swiss franc based on policy divergences, BofA suggests the currency’s current weakness may be short-lived.
The Swiss franc is currently trading near early 2024 levels, indicating that it retains much of its overvaluation. The Swiss National Bank (SNB) has flagged the possibility of a rate cut, which could potentially return to negative territory. However, the Bank of Australia senses the SNB’s hesitance to take unconventional policy measures.
Analysts have questioned the effectiveness of potential future policy measures once the policy rate reaches what Bank of America considers a terminal rate of 0.25%. The SNB can rely on forward guidance and foreign exchange interventions, but history shows that these tools can have limited impact.
Further complicating matters is the upcoming political landscape in Europe, with German elections on the horizon. Analysts have noted a strong correlation between the euro’s volatility premium and the Swiss franc, which has been particularly evident in recent months. The increased level of volatility in the euro is a cause for concern as it could impact the movement of the Swiss franc.
While BofA’s forecasts assume a continued short position in the Swiss franc, they recommend investors consider hedging strategies. In particular, they propose the use of winged hedging structures that could benefit from potential risks associated with the expected increase in volatility ahead of the German elections.
The SNB’s reluctance to engage in unconventional policy measures and the potential impact of European political risks on currency volatility create a challenging backdrop for the Swiss franc.
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