The CHF is gradually moving away from the status of financing currency

The Swiss franc has only seen five net selling days since the end of April, only one of which saw a relatively large flow.

BNS – We believe that the June decision of the BNS is balanced. The recent pressure on the euro will likely tip the balance in favor of a decline, but the direction will certainly be hawkish. This will be reflected in inflation forecasts, which are expected to show significant upward returns to 1.5% or more for the coming years, supporting recent interventions by the outgoing SNB chairman hinting at breakeven rates higher.

The CHF has been one of the best-performing currencies on iFlow over the past six weeks, which was the case before the latest fluctuations related to the European elections. The Swiss franc has only seen five net selling days since the end of April, only one of which saw a relatively large flow. Most of these flows are linked to the dynamics of monetary policy, especially since there is a strong chance that the SNB will follow the ECB by adopting a “hawkish cut”, or even no reduction at all. Valuations are also generally favorable. Although increases of this magnitude are rare in G5 currencies and difficult to sustain, renewed risk aversion could generate additional buying. At +0.51 daily flows, current buying is quite extreme, so the magnitude of flows will likely need to come down.

Spot flows are also in favor of the Swiss Franc, which is surprising given the shortage of assets outside of equity markets. Last week was difficult, but the dynamic seems to be changing again thanks to positive flows although the natural bias should be to sell CHF. So far, there is no clear indication of a run on the Swiss Franc in terms of liquidity, which also indicates limited risk aversion arising from the Eurozone’s problems.

Volumes denoted in CHF have surged over the past three weeks. However, the peak was reached towards the end of the month and it is difficult to conclude that there was a sudden increase in trading due to risk aversion in the Eurozone. Additionally, the two-month average at +0.72 is also quite moderate compared to some other G10 currencies. Based on current trends, flows could fall below 0.8 in volume for the first time this month. It is possible that trading will resume in the event of a surprise from the SNB, but combined with the direction of flows, it seems that the markets are content to unwind some financing positions, but very gradually.

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Low volume explains why high flow scores did not translate into significant changes in holdings. Historically, the CHF has had slow fluctuations. Nearly two months at the top of the flow rankings saw only about a 30% reduction in holdings, from -1.2 to about -0.8. These positions also remain relatively profitable, although we note that the weighted average profit has fallen from 1.2% two months ago to 1.0%, many historically positive positions financed by the CHF have been withdrawn and that the remaining positions suffered from the recent strengthening of the Swiss Franc. We have no doubt that the risk of losses on positions and that holding companies become positive could speed up procedures.

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The spread between CHF holdings and the JPY and SGD (which make up our basket of “safe havens”) is now at its lowest level since 2022. In June 2022, the SNB was considered one of the central banks the most hawkish, with an increase earlier and more significant than expected. The currency was even considered overheld, as there was every reason to suspect that the SNB would outperform the ECB. This prediction turned out to be incorrect, but the SNB once again has a unique opportunity to surprise with a hawkish decision. The holding levels reached two years ago are probably out of reach, but it is certainly possible to eliminate more positions.

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