Why is CHF not weaker? BoA Securities explains

Playing for Swiss franc weakness has by far the most consensus trade since the start of the year, according to Bank of America Securities, yet the currency has failed to weaken as much as expected. 

At 08:25 ET (12:25 GMT), USD/CHF traded 0.1% higher at 0.8525, up 1.3% year to date, but down 0.6% over the course of the last month.

The reasons behind the expected Swiss franc weakness are solid, BOA explained, given Switzerland is a country with a historical tendency to deliver below target inflation. It has a central bank committed to prevent significant FX appreciation and a defensive domestic asset market, which all add to a country where FX weakness should be expected. 

“However, to coin a popular analogy, this has very much been a year of two halves: significant FX weakness in H1 and a recovery in H2,” analysts at BOA Securities said, in a note dated Sept. 3.

“The causes of the turnaround in CHF are well known and well documented and are a salient reminder that CHF retains its risk-off hedging allure,” the bank added. “Geo-politics and regime shifts have constantly come to the rescue of CHF and so has been the case this year.”

Looking ahead, the U.S bank still sees the carry trade as likely to be a dominant factor weighing on CHF.

“In the near-term, trend favours some upside but we think we are entering the sell zone ahead of the SNB policy decision,” BOA said, with the Swiss National Bank set to make its next call on Sept. 26.

Source: Investing.com