Fixed income analysts at Morgan Stanley address chatter that the SNB could begin liquidating their massive foreign exchange holdings after giving up the floor.
We “do not believe the SNB will start shrinking their balance sheet and become sellers. Instead, we believe they are more likely to increase USD holdings by reinvesting cashflows from European government bond redemptions into Treasuries. This on the margin will favour UST/euro spreads tightening.”
It makes sense and will add to EUR/USD weakness but probably not substantially, or quickly. The key is to focus on the short-term at the moment if you’re trading. Fundamentals or long-term flows mean next-to-nothing.
