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Investing.com - The Swiss franc has been the third worst-performing G10 currency against the U.S. dollar since the start of the Iran conflict, according to UBS. The bank attributes part of the weakness to the Swiss National Bank’s growing opposition to franc strength and to month-end rebalancing flows from local investors.
The SNB warned of greater foreign exchange intervention on March 2 and pushed back against rate hike expectations at its March 19 meeting. Month-end rebalancing by Swiss real money investors, following declines in foreign equities and fixed income in March, drove demand for USD/CHF and EUR/CHF upside last week.
UBS expects the impact of these time-sensitive flows to fade in the near term. The bank maintains a bullish CHF view with an end-Q2 EUR/CHF target of 0.90, in line with its year-end forecast, based on expectations that domestic investors will continue to favor local over foreign assets.
The bank argues that Switzerland’s persistently lower inflation relative to its trading partners would allow the SNB to tolerate nominal CHF appreciation, provided the franc remained broadly stable in real effective exchange rate terms. The REER index spiked to early 2015 levels ahead of the March SNB meeting but has since retreated to 2025 levels.
UBS says the retreat in the REER index has eased some valuation concerns that briefly challenged its bullish franc view and deterred the bank from chasing further CHF strength at the time.
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