USD/CHF weekly
BofA argues that the Swiss franc (CHF) remains exceptionally strong — the second-best performing G10 currency YTD — because it has reasserted itself as the true safe-haven hedge, alongside gold, amid global fiscal worries and geopolitical risks. Standard “risk-off” explanations fail to capture the full story: CHF strength is driven more by structural forces, including Switzerland’s fiscal credibility, the FX options market, and the lack of effective intervention tools by the SNB.
Key Points:
Traditional “risk-off” explanations are too simple:
• The usual claim is that CHF rallies as a geopolitical risk hedge, but this doesn’t fully explain its outperformance because broader market volatility remains near recent lows.
• The only traditional correlation that still holds up is CHF’s tight link with gold — both are liquid non-USD hedges.
Japan’s JPY no longer holds the ‘safe-haven’ crown:
• CHF (and gold) are the standout non-USD hedges today, since the yen has lost credibility as a pure risk-off proxy.
• The SNB’s return to zero interest rate policy (ZIRP) has not deterred the market’s appetite for CHF.
The options market signals deeper demand:
• USD/CHF 1-year implied vol premium is at its highest since 2017 versus the G10 average — highlighting how CHF is increasingly used to hedge fiscal risk.
• This dynamic shows that “risk-off” means more than just classic vol metrics like the VIX; it now includes deep fiscal concerns, especially in the US.
The SNB’s policy levers look ineffective:
• Verbal interventions have failed.
• Physical FX intervention is constrained, partly due to political constraints tied to US tariff tensions.
• The SNB’s traditional rate policy cannot offset deep, structural safe-haven flows when investors trust Switzerland’s fiscal prudence while worrying about ballooning deficits elsewhere.
BofA’s big picture view:
• If global fiscal sustainability becomes a more pervasive concern, the CHF will stay stronger for longer — especially versus the USD and JPY.
• The SNB may need to “think outside the box.” This could mean prioritizing explicit FX management over rates, effectively turning interest rates into an endogenous tool to manage the currency rather than inflation targeting alone.
Conclusion:
BofA sees stronger-for-longer CHF as the base case because global capital wants a liquid, credible hedge against fiscal uncertainty — and the franc fills that niche better than almost any other G10 currency today. Unless the SNB adopts more radical FX management tools, efforts to weaken the franc will likely remain ineffective.
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