UBS has signaled that recent weakness in the Swiss franc should ease as transient, timing-driven flows fade. The bank noted that the franc has been the third worst-performing G10 currency against the U.S. dollar since the start of the Iran conflict, a performance it attributes in part to shifts in the Swiss National Bank's messaging and to month-end portfolio rebalancing by local investors.
The SNB took a more explicit stance on foreign exchange on March 2, warning of greater intervention, and at its March 19 meeting it pushed back against expectations of further rate hikes. UBS says those public interventions and communications contributed to the franc's softer performance in recent weeks.
UBS points to month-end rebalancing flows as another driver of the recent moves. After declines in foreign equities and fixed income in March, Swiss real-money investors reportedly rotated back into domestic holdings at month-end, increasing demand for USD/CHF and exerting upward pressure on EUR/CHF during the last week covered by the bank's note.
Importantly, UBS expects the effect of these flows to diminish in the near term, characterizing them as time-sensitive rather than structural. The bank retains a constructive view on the franc and has maintained an end-Q2 EUR/CHF target of 0.90, which is consistent with its year-end projection. That stance rests on the bank's expectation that domestic investors will continue to prefer local assets over foreign ones.
UBS also highlights inflation differentials as a factor that could permit nominal appreciation of the franc without creating undue pressure. The bank argues that because Switzerland's inflation remains persistently lower than that of its trading partners, the SNB can tolerate some nominal CHF strength provided the franc's real effective exchange rate - the REER - remains broadly stable.
On that front, UBS notes the REER index spiked to levels seen in early 2015 ahead of the March SNB meeting but has since retreated to 2025 levels. The bank says this retreat has eased valuation concerns that briefly challenged its bullish franc view and that it avoided chasing further franc strength at that time because of those concerns.
Implications
- UBS expects temporary flow effects to fade, supporting its continued bullish view on the franc.
- The bank's end-Q2 EUR/CHF target of 0.90 remains unchanged and aligns with its year-end outlook.
- Movements in the REER index influenced UBS's near-term positioning and assessment of valuation risk.