NEW YORK, May 23 (Reuters) - Switzerland’s franc, which is down against the dollar and euro this year, should continue to fall as receding risks in the euro zone and a strengthening economy in the United States sap demand for the safe-haven currency.
Expectations for more stimulus from the Swiss National Bank have also weakened the appeal of the franc and has boosted demand for options that will profit on the franc’s weakness.
“Going long the dollar versus the franc is by far one of the best trades around,” said Sebastien Galy, FX strategist at Societe Generale in New York.
The dollar is up 5.9 percent versus the Swissie so far this year, lately trading at 0.9694 franc, a move that contrasts with 2012 when it sank 2.4 percent.
However, widespread risk aversion on Thursday stemming from weak manufacturing data out of China, the world’s second-largest economy, buoyed the Swissie, causing it to bounce from a nine-month low against the dollar and two-year trough versus the euro hit the previous session.
Nevertheless, Societe Generale’s Galy predicts dollar/franc rising to 0.99, 1.06 and 1.07 by September, December and March 2014, respectively.
SNB chief Thomas Jordan on Wednesday said he declined to rule out negative interest rates. It comes as the U.S. Federal Reserve has started to lay the groundwork for an eventual reduction in its monthly bond-buying purchases.
“The Swiss franc is going to be the big laggard among European currencies,” said Alessio de Longis, a portfolio manager at Oppenheimer Funds in New York.
“The systemic part of the euro zone crisis is largely behind us and with Europe now in a more business-as-usual environment, we will continue to see outflows from safe-haven assets and demand drying up for the Swiss franc,” he said.
Oppenheimer’s de Longis, who helps oversee $24 billion in assets, said they hold an “underweight” in the Swiss currency, and could move to a short position.
Options investors have upped the ante on dollar/franc hedging, with three-month implied volatility - a measure of demand for options and expected future price swings - hitting its strongest since late August 2012.
Switzerland faces worsening deflation, with data from April showing consumer prices falling 0.6 percent year-on-year. That allows the SNB, which next meets on June 20, to keep policy loose, a negative for the franc.
The SNB’s Jordan said they are committed to a 1.20 cap it imposed on the franc in September 2011 against the euro. The cap was put in place as investors flocked to the currency during the euro-zone crisis. Euro/Swiss franc last traded at 1.2508 francs, up about 3.6 percent on the year.