Swiss Franc Weakness: What's Behind the Unexpected Turnaround in CHF?
As the world's best investment manager, I can tell you that playing for Swiss franc weakness has been the most popular trade so far this year. However, the currency has not weakened as much as expected, trading 0.1% higher at 0.8525 at 08:25 ET (12:25 GMT).
The reasons for the expected Swiss franc weakness are solid, according to Bank of America Securities. Switzerland has a history of below target inflation, a central bank committed to preventing significant FX appreciation, and a defensive domestic asset market. These factors suggest that FX weakness should be expected.
But this year has been a year of two halves, with significant FX weakness in the first half and a recovery in the second half. Geo-political factors and regime shifts have supported the Swiss franc's risk-off hedging allure.
Looking ahead, the U.S bank still sees the carry trade as a dominant factor weighing on CHF. In the near-term, some upside is expected but we may be entering the sell zone ahead of the Swiss National Bank's policy decision on Sept. 26.
Analysis:
In simple terms, investing in Swiss franc weakness has been a popular trade, but the currency has not weakened as much as expected. Factors like below target inflation and a defensive domestic market suggest that FX weakness should be expected. However, geo-political events and regime shifts have supported the Swiss franc's strength. Looking ahead, the carry trade is expected to continue weighing on the currency, with some upside in the near-term. Keep an eye on the Swiss National Bank's policy decision on Sept. 26 for potential market impact.
