The rip in EUR/CHF after the SNB expanded negative deposits is the big story in US trading.

Nordea looks at other measures the SNB could take.

The correction in the USD, Grexit fears have put pressure on the CHF to strengthen. The SNB is likely returning to FX intervention. The QE and/or soft range target could be the next step, should the EUR/CHF move below 1.

Pressure on CHF to strengthen

Steady as she goes. The CHF has kept strengthening for the past month, driven by fears of Grexit and the USD correction, which put pressure on USD/CHF (one of the favourite crosses to express the USD view last year). As a result, EUR/CHF has almost come back to parity. It seems the SNB has lost its nerve, and the sight deposit rate suggests it might have already intervened as EUR/CHF dipped below 1.03 (Figure 1). Although the SNB already has a huge balance sheet, the housing market risk is not present the way it was back in 2012. It seems there has been a slowdown in the credit and house price appreciation. So, the FX interventions could persist for a while, at least.

SNB worried about the effects

A sharply strong CHF has had its mark on the economy already, and it was not just a temporary blip: the manufacturing PMI remains at below 48 as the unemployment component dropped to the lowest level since 2009 and the retail sales volume collapsed 2.7% y/y in February. Also,

It is obvious by now the SNB is not happy with the situation. SNB's Jordan noted he sees "difficult times ahead for Switzerland", but hoping 1% growth is still achievable. But if the economic momentum does not improve, even 1% will be a challenge.

Life below parity....

What are the alternatives for SNB, apart from FX intervention?

1. The deposit rate will likely be kept at -0.75%. It was, in fact, intended to weaken the CHF (SNB's Jordan: " it is important that the negative interest rate be allowed to take effect and help to bring about a weakening of the Swiss franc").

2. They could still do the QE, in their own way. The IMF, in their Article IV report (March 23), suggested the SNB could do a special, FX-QE, since the domestic asset pool is limited. The SNB Board member Moser admitted that it is one of the options for the SNB.

3. Another / complementary option for the SNB to be reintroduce a "soft" target or range for EUR/CHF, e.g. 1.10 - 1.15, should the EUR/CHF fall back to below parity again.

CHF strength to persist short term

As noted last month, the CHF should go "stronger first", and it seems there is room for more before the SNB responds. Once the Grexit fears abate, and the SNB reacts, the EUR/CHF should move back to above 1.10. The CHF is still the most overvalued currency in the G10 space by any measure (EUR/CHF "fair value" above 1.25). We therefore agree with the SNB's chief Jordan: "Overall, the Swiss franc is significantly overvalued and should weaken with time."

inflation turned into

deflation again - including the core. Figure 3. Back to deflation mode.

For bank trading recommendations, check out eFX Plus. Yesterday, Morgan Stanley recommended a EUR/USD short at 1.0800 with a stop at 1.0900 and a target at parity. It looks like they top-ticked the entry.

SocGen and Citi also reacted to today's move.

SocGen: The SNB move to tighten its rule on sight deposits increases the odds that it will go for more negative interest rates, especially faced with the risk of a Greek event. The SNB tightened its rule on sight accounts so that very few entities are exempt from negative interest rates. Such funds could avoid the penalty of deposit with commercial banks or the Swiss sovereign curve (-1.10 at 1Y). Whether it is the SNB pension fund or other it forces these agents to take on more risk. With most assets overbought in Switzerland it means mostly buying in the US as the reluctance to buy in the Eurozone remains extreme.

Citi: Keeping investors on their toes, today's indications certain public entities would no longer be exempt from negative rates has taken EURCHF higher...All said, more CHF cash hit by negative rates increases the incentive of such depositors to either pass on the cost or shift into other currencies. This should however represent more of a stock effect than flow, and without resolution of bigger CHF supports (policy convergence, Greek gridlock), EURCHF may struggle to extend the latest rally. Nevertheless, uncertainty is certainly on the rise in CHF and around the SNB reaction function.