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Swiss Franc sentiment shift: Hedge funds turn bearish amid SNB speculation

Swiss Franc sentiment shift, forex analysis

Hedge funds, known for their speculative prowess in financial markets, recently shifted their stance on the Swiss Franc, transitioning from a bullish outlook to a bearish one in a remarkably short span of time.

This shift occurred just one week after they had significantly increased their long positions, signaling a swift change in sentiment regarding the currency's prospects. The sudden turnaround stems from conjecture circulating in the market, suggesting that the Swiss National Bank (SNB) might no longer be actively supporting the Franc through purchases and might even consider lowering interest rates in the near future.

Data from the Commodity Futures Trading Commission (CFTC) reveals that leveraged funds, a cohort that includes hedge funds, transitioned into net sellers of the Franc during the week ending on February 6th. This abrupt reversal contrasts sharply with the previous week's sentiment, during which the market exhibited its strongest bullish stance since November.

The repositioning coincides with the release of data from the Swiss National Bank, indicating a potential shift in the central bank's strategy towards becoming a net seller of the Franc. This shift follows the SNB's announcement in December, wherein it stated its intention to diversify its focus away from currency purchases exclusively.

Historically, the SNB's interventions in the currency markets have served as a crucial pillar of support for the Franc. These interventions have prevented excessive appreciation, which could negatively impact Switzerland's export-driven economy by putting downward pressure on consumer prices.

However, with inflation remaining below the SNB's 2% target and recent indications of a halt in the tightening cycle, the rationale for a bullish outlook on the Franc appears to be diminishing.

Sascha Kever, an asset manager at Pkb Privatbank AG, commented on the prevailing market sentiment, highlighting the lack of clarity from the SNB as a significant factor influencing leveraged positions.

Kever suggested that a potential 25 basis point rate cut at the SNB's upcoming meeting in March could further weaken the Franc, potentially driving the EUR/CHF pair to levels not seen since July.

This recent repositioning by leveraged funds represents the third instance of a reversal in sentiment this year. The market began 2024 with a bullish stance on the Franc, then shifted to a neutral position amid concerns of overvaluation, before reverting to a bullish outlook once again.

Analysts attribute this oscillation to factors such as the Franc's perceived safe-haven status amidst geopolitical uncertainties.

The Swiss Franc has experienced a decline of nearly 4% against the US Dollar since the end of December, ranking as the third weakest performer among major currencies within the Group of Ten (G10).

In London trading, the Franc was hovering around 0.8751 against the Dollar, close to its lowest level since mid-December. Against the Euro, it depreciated to its lowest point in almost three weeks.

Ulrich Leuchtmann, head of FX research at Commerzbank AG, weighed in on the situation, expressing skepticism regarding rumors suggesting SNB's active selling of the Franc.

Leuchtmann highlighted the potential confusion caused by such rumors, which could contribute to increased volatility in market positioning.

CFTC data indicates that leveraged funds have amassed 1,537 contracts betting on Franc depreciation, marking the highest level since mid-December. This is a notable decrease from the previous week's long positions, which reached their peak since early November.

In light of these developments, currency strategists at Bank of America Corp, Claudio Piron, and Athanasios Vamvakidis, recommended shorting the Franc against both the Pound and the Euro.

Their recommendation stems from the belief that the Franc is overvalued, combined with indications that the SNB might cease shrinking its balance sheet, intervene in the market, and express concerns about the currency's strength.

Bloomberg source.

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