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Swiss Franc’s Rally Is Seen Refueled by Italian Political Chaos

Swiss Franc’s Rally Is Seen Refueled by Italian Political Chaos

(Bloomberg) -- The Swiss franc’s longest rally in more than a year may just have been recharged by the Italian political tumult.

The haven currency, which reached a two-year high versus the euro this week, may extend gains as a raft of supporting factors converge, Jordan Rochester and Yujiro Goto, strategists at Nomura International Plc, wrote in a note to clients. Safety bids fueled by global trade tensions and Italy’s turbulent politics, market positioning and the franc’s relatively cheapness all suggest room for a further advance in the Swiss currency, they wrote.

The Swiss National Bank appears to be refraining from large-scale market intervention aimed at reining in exchange-rate strength, which eats into inflation, and that also works in the franc’s favor, according to the analysts. The currency strengthened every month starting May, the longest run of such gains since February 2018, and reached 1.0863 per euro this week, its strongest level in two years.

Swiss Franc’s Rally Is Seen Refueled by Italian Political Chaos

The franc was on course for a weekly gain after Italian political risks flared up yet again, with one of the coalition partners withdrawing support to the government in Rome and called for an early election.

“The Italy headlines overnight make a short euro-franc trade even more attractive,” Rochester said in emailed comments. “The SNB remains on the sidelines for now. From a positioning perspective, the market is not long franc. Valuations suggest it remains undervalued and we can’t see why franc shorts make sense given our view that risk sentiment will continue to deteriorate,” Rochester and Goto wrote in the note.

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The franc needs to appreciate more than 4% to 1.04 per euro to be fairly valued, according to Nomura’s Rochester. It was at 1.0905 Friday afternoon.

The latest data showed that SNB’s sight deposits, seen as an early indicator of intervention, jumped to a record high, spurring speculation the SNB had stepped in to cap franc gains. However, the figures don’t suggest significant central-bank activity, according to the strategists.

“Despite the excitement caused by an increase in sight deposits at the SNB, foreign-exchange reserves data were pretty unexciting,” they wrote. “If changes caused by foreign-exchange valuation and asset returns are stripped out, we estimate less than 3 billion francs ($3.1 billion) of intervention -- a number that is within the margins of error and not suggestive of any large intervention.”

--With assistance from Anooja Debnath.

To contact the reporter on this story: Greg Ritchie in London at gritchie10@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Anil Varma

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