Investing.com – Bank of America (BofA) analysts have highlighted concerns about the durability of the recent decline in the value of the Swiss franc (CHF). Despite the widespread trend among investors to miniature the CHF based on policy divergences, BofA suggests that the currency’s current weakness may not be sustainable.

The Swiss franc is currently trading near early 2024 levels, indicating that much of the overvaluation still remains. The Swiss National Bank (SNB) has indicated the possibility of interest rate cuts, potentially moving back to negative levels. However, BofA senses the SNB’s hesitation to again adopt unconventional policy measures.

Analysts question the effectiveness of potential future policy measures once the interest rate reaches its final level, according to BofA, at 0.25%. The SNB can rely on forward guidance and currency interventions, but history suggests these tools may have confined impact.

The situation is complicated by the upcoming political landscape in Europe with elections in Germany on the horizon. Analysts note a mighty correlation between the euro volatility premium and the CHF exchange rate, which has been particularly noticeable in recent months. The increased level of euro volatility is a cause for concern as it could impact movements in the Swiss franc.

While BofA forecasts suggest maintaining a fundamental miniature position in CHF, they recommend investors consider hedging strategies. In particular, they suggest the apply of wing structures for hedging, which could exploit the potential risks associated with the expected enhance in volatility ahead of the German elections.

The SNB’s reluctance to engage in unconventional policy measures and the potential impact of European political risk on currency volatility provide a intricate backdrop for the CHF.

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