Deutsche Bank - What can the SNB do if the ECB cuts rates on Thursday?

Deutsche Bank - "Assuming the floor stays in place there are three possibilities:
1. Nothing. EUR/CHF is close to unchanged since the market started pricing more ECB easing. With the Swiss real estate market frothy and ongoing concerns around excessive mortgage lending, it is unclear whether more domestic easing will help fix what is largely imported disinflationary pressure.
2. Follow the ECB. The problem with doing nothing is that the market is already pricing a rate cut. This has allowed implied EUR/CHF forwards to stay remarkably stable over the last few weeks: Swiss expectations can be broken down into about 10bps of cumulative SNB easing in H2 (similar to the ECB) and an additional 5bps widening in cross-currency basis reflecting expectations of liquidity injections.
3. Let EUR/CHF settle at the floor. The alternative to cutting rates would be to allow EUR/CHF to settle on the 1.20 floor and intervene. This would entail semi-permanent balance sheet expansion: by printing Swiss francs and using the proceeds to buy EUR and accumulate reserves.

Among these options, we believe the SNB would prefer the first option the most (do nothing), the third option the least (constantly intervene) and as a result be forced to settle on the second option by default (copy the ECB)."

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Tags: Deutsche Bank, ECB SNB, Swiss SNB

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