With the ECB’s surprise rate cuts last week, the case for the SNB to act is becoming more compelling, argues Deutsche Bank.
DB outlines 4 reasons behind this view:
First, the move lower in EUR/CHF has been more than twice as large as after the ECB initially cut rates to negative. The cross is also trading where the SNB have sought to hurt speculative positioning in the past.
Second, the move lower in European yields has seen short-end euro rates fall below those of Swiss ones, raising the risks that investors swap franc for euro funding.
Third, other central banks with euro currency pegs have responded to the ECB. The Danish Nationalbank cut rates back to negative last week after resisting the temptation in June.
Finally, the up-to CHF 4bn worth of open market purchases by Hungarian authorities to wipe out foreign FX liabilities could put short term appreciation pressures on CHF before year-end.
“One option for the SNB would be to raise the 1.20 floor. However, this would only serve to replace a durable arrangement with an untested one and also involve large FX intervention,” DB argues.
“Another approach would be to mirror the ECB and cut rates to negative. By imposing a tax on foreign holdings of Swiss cash, the SNB could generate a strong FX impact without having to pump further liquidity into a financial system suffering from highly overvalued financial and residential assets, as well as increasing risks to their balance sheet,” DB adds.
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