BofA sees CHF weakness as unsustainable in 2025

Investing.com -- Bank of America (BofA) analysts highlighted concerns regarding the sustainability of the Swiss Franc's (CHF) recent decline. Despite a common trend among investors to short the CHF based on policy divergence themes, BofA suggests that the currency's current weakness may not last.

The Swiss Franc is currently trading near levels seen at the beginning of 2024, indicating that it retains much of its overvaluation. The Swiss National Bank (SNB) has indicated the possibility of rate cuts, potentially moving back into negative territory. However, BofA senses a hesitancy from the SNB to adopt unconventional policy measures once again.

The analysts are questioning the effectiveness of potential future policy measures once the policy rate reaches what BofA perceives to be the terminal rate of 0.25%. The SNB may rely on forward guidance and FX interventions, but history suggests these tools may have limited impact.

Adding to the complexity is the upcoming political landscape in Europe, with the German elections on the horizon. The analysts note a strong correlation between the Euro volatility premium and the CHF, which has been particularly evident in recent months. The elevated level of Euro volatility is a cause for concern, as it could impact the Swiss Franc's movements.

While BofA's forecasts suggest maintaining a core short position on the CHF, they recommend that investors consider hedging strategies. Specifically, they suggest using wing structures to hedge, which could capitalize on the potential risks associated with the anticipated rise 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 present a complex backdrop for the CHF.

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Source: Investing.com