UBS on SNB: Magic Words Failing by Milan Cutkovic

Suspected intervention

Price action over the last few days suggests to us that the SNB might have started to
purchase EURCHF to defend the 1.20 EURCHF floor. Next Monday’s weekly sight
deposit numbers should give the market the first indication whether these suspicions
are true and to what extent. We believe any sizeable increase in sight deposits could
boost euro assets such as bonds and equities and weigh on euro crosses, due to
investors anticipating SNB diversification trades.

Floor trap

The lack of speculative flow suggests to us that the reason for heavy EURCHF trading is
structural, and indeed today’s trade numbers showed yet another record high external
surplus. We think traders largely feel unable to go long EURCHF at this point because
the tail risk of the floor breaking is looming too large. As a result, the cross could
become trapped at current levels with the SNB prompted to be active on a daily basis.

Going negative

Negative deposit rates might be the only way out of the situation as they would give
traders renewed incentives to sell Swiss francs. The SNB would probably want to be
very cautious and not impose more than 10bp initially but be willing to escalate the
measure should it be required. Ultimately we believe the measure should be enough to
effectively protect the floor and prevent renewed large scale intervention.

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