Swiss Franc Extends Rally Toward 1.16 But Gains Seen Short-Lived

(Bloomberg) -- The Swiss franc may have made a dramatic comeback after falling past what was once its exchange-rate cap, but the gains may not last.

The currency, which has rallied more than 3 percent since testing the 1.20 level last month, seems to have mostly priced in the Italy risks and it’s only a matter of time before it resumes the weakening trend, according to Nordea Bank AB. Andreas Steno Larsen, a currency strategist at the Swedish bank, sees it retreating to 1.18-1.19 by year-end while Canadian Imperial Bank of Commerce also has a similar prediction.

Swiss Franc Extends Rally Toward 1.16 But Gains Seen Short-Lived

The franc had slid through March and April on expectations the Swiss National Bank will keep its dovish policy bias even as the European Central Bank leans toward tightening. While the currency’s latest rally is something the Swiss central bank is likely to keep a watchful eye on, given that it runs counter to policy makers’ goal to spur inflation, analysts see little reason yet for the SNB to be worried.

“There is an element of perhaps seeking calmer waters” driving franc gains, said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial. “Over time, we will see euro-Swissie grinding back higher. This will ease some of the furrow lines on the brow of the SNB governor who would probably be more concerned at 1.17 and change than he would have been on 1.19 or toward 1.20.”

He sees the franc at 1.19 by year-end. The currency strengthened toward 1.1600 on Wednesday for the first time since March. Technical charts suggest the franc is currently the most overbought since the SNB removed the exchange-rate cap.

Positioning Trends

Positioning data also signal it will be tough for the franc to jump much higher. Asset managers continued to add to positions betting on its decline, taking net shorts in the Swiss currency to a record in the week ended May 15. Nordea’s Larsen sees a short-term advance to 1.16 that could prompt the SNB to intervene and curb the currency’s strength.

“If we are getting back toward 1.16, that would be more of a trigger point for the SNB to perhaps be more vociferous,” CIBC’s Stretch said. “There is a little bit of a line around the 1.1650 level and if we cross that rubicon, then perhaps the SNB would become a little bit more obvious in terms of their displeasure.”

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