BofA favors Swiss franc over euro for bearish dollar view amid yield shifts

Bank of America strategists are recommending investors express bearish dollar views against the Swiss franc rather than the euro, citing their Currency and Rates Strategy model's entry into a "macro shock regime" triggered by falling U.S. Treasury yields. While USD/EUR and USD/CHF were correlated, recent idiosyncratic weakening of the Swiss franc due to high U.S. tariffs is seen as potentially de-escalating, making CHF a more favorable vehicle for dollar short positions. The primary risk to this bearish dollar outlook is a stronger-than-expected ISM services data reading.

Analysis

Bank of America strategists are advocating for a bearish U.S. dollar position expressed against the Swiss franc over the euro. This recommendation is underpinned by their proprietary Currency and Rates Strategy (CARS) model entering a "macro shock regime," a state triggered by the recent decline in U.S. Treasury yields which historically favors the franc. While both the euro and franc have been highly correlated to the dollar in 2023, the franc has recently shown relative weakness, a move BofA attributes to idiosyncratic pressure from high U.S. tariffs on Switzerland. The core of the trade thesis lies in the potential for this tariff-related headwind to "de-escalate," which would position the Swiss franc for a more significant recovery against the dollar compared to the euro. However, the strategists identify a key near-term risk to this bearish dollar view: a potential rally in the U.S. currency, particularly if the upcoming Institute for Supply Management (ISM) services data is stronger than anticipated.

Key Decisions for Investors

• For investors holding a bearish view on the U.S. dollar, consider executing this strategy via a long Swiss franc position (short USD/CHF) rather than a long euro position, to capitalize on the potential for tariff-related pressures to ease.
• Closely monitor upcoming U.S. ISM services data, as a stronger-than-expected reading represents the primary identified risk that could trigger a near-term dollar rally and invalidate the trade's premise.
• Investors should track any developments or news regarding U.S. tariff policy towards Switzerland, as a de-escalation is the central catalyst for the franc's expected outperformance.