UBS expects the Swiss franc to weaken further against certain higher-yielding currencies that display strong pro-risk characteristics, naming the Australian dollar, Brazilian real and Norwegian krone as examples, according to a note released Wednesday.
The bank outlined several dynamics it believes will limit Swiss franc strength through the remainder of the second quarter. UBS specifically said rallies in USD/CHF toward approximately 0.80 should attract selling from local corporate entities, a flow the firm expects will help contain any extended appreciation of the franc.
On the euro-franc front, UBS remains skeptical of significant upside for EUR/CHF beyond the 0.9260 level. The bank pointed to the growth-negative implications of projected European Central Bank rate hikes in the context of a terms-of-trade shock, and suggested that those factors will likely blunt rate support for the pair.
Reflecting that view, UBS regards rallies to the 0.9260 area as attractive entry points for short positions in EUR/CHF. The bank's outlook stems from concern that ECB monetary tightening could weigh on economic growth in the euro area, a dynamic it believes undermines a sustained advance in EUR/CHF above that threshold.
UBS also drew a distinction between the franc's behaviour against major reserve currencies and its path versus currencies with stronger risk-on characteristics. The firm's analysis implies the recent pattern of franc weakness versus selected higher-yielding currencies has room to continue, even as its performance versus major reserve currencies may diverge.
In summary, UBS expects continued selective franc depreciation versus pro-risk, higher-yield currencies, sees potential selling pressure on USD/CHF near 0.80 from domestic corporates, and doubts sustained EUR/CHF gains above 0.9260 due to anticipated ECB tightening and its growth implications.