As we noted earlier this week, the pickup in sight deposits raised the probability around more CHF negative outcomes. Keeping investors on their toes, today’s indications certain public entities would no longer be exempt from negative rates has taken EURCHF higher. These include the “scarcely used” accounts of Geneva/Zurich Canton, City of Zurich and the deposits associated with the Confederation, including PUBLICA (~38bn CHF).
To an extent lower rates paid to these entities could represent more of a business decision heading into annual report and AGM later this week given the opportunity cost these exemptions represent. Not making a bigger noise about the scale or linking the move to levels in FX supports this interpretation. On the second level and more left-field, policymakers may be testing the influence of their actions on the markets so as not to commit their credibility to the durability of CHF weakness but still work out how strong the market hand is.
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.