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Weakness in the Swiss franc is unlikely to extend say analysts at a leading Swiss private bank.
Bank J. Safra Sarasin Ltd say in a client research briefing that the a sector rotation in stock markets combined with speculative activity in the derivatives space have pushed the Swiss franc markedly lower.
"However, we believe that the current weakness is unlikely to extend further," says Dr. Claudio Wewel, FX Strategist at J. Safra Sarasin.
The call comes as the Pound reasserts its 2021 uptrend against the Franc, advancing a further third of a percent ahead of the weekend to quote at 1.2960.
Those watching the market will be aware that a significant later of resistance litters the path towards the psychologically significant 1.30 level:
Sterling strength has failed around here for much of March and investors will be wondering whether another failure beckons.
However, a convincing break of 1.30 would likely open the door to an acceleration in the rally and the potential for new higher ranges.
But the expectation for a Swiss Franc rebound by Wewel suggest such a move higher will be unlikely, if proven correct.
For Wewel, the Swiss Franc's attractiveness as a safe-haven asset will benefit it at a time when Europe suffers another wave of covid-19 infections.
"The emergence of more contagious or lethal virus variants are likely to revive safe-haven tailwinds," says Wewel.
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J. Safra Sarasin say the Swiss franc’s decline of late has only been partially driven by recent yield dynamics, which stands in contrast to the bulk of recent FX moves.
Instead, the unexpectedly sharp move appears to be linked to the sector rotation in risk assets (stocks) they say, which has unfolded amid surging yields and give euro area stocks a relative edge over Swiss risk equities.
Above: Recent equity sector rotation has given European cyclical stocks an edge. Image courtesy of J. Safra Sarasin.
"Speculative activity in the derivatives space appears to havem amplified the movement: for the first time since July 2017, the 3-month EUR-CHF risk reversal has turned negative and speculative positioning has become markedly more CHF-bearish as of late," says Wewel.
He reminds investors in a note dated March 26 that it is important to keep in mind that the Swiss franc’s recent weakness unfolded on the back of the anticipation of soon re-openings.
"Given the latest developments on the virus front, we however believe that the risk for further protractions remains substantial and hence, the Swiss franc’s current weakness is likely short-lived," says Wewel.
"The steady emergence of more contagious or lethal virus variants constitutes a substantial threat to global vaccination efforts. This implies that virus uncertainties will persist for longer than previously anticipated, which should revive safe-haven tailwinds and yield support for the Swiss currency," he adds.