SNB: Fewer exemptions from negative interest

Forex News and Events

After a few months of uncertainty during which investors tried to determine whether the SNB was actively defending the implicit target of 1.05-1.10 band in EUR/CHF, traders have begun to challenge the SNB by pushing the Swiss franc slowly but surely toward the parity. Since February 20, EUR/CHF lost more than 5%, from 1.0811 to 1.0236 on April 21. The market quickly realized that the 1.05-1.10 band was more a trading floor rumour than a reality. Yesterday, the SNB surprised the market by announcing stricter exemption rules as the institutions associated with the Confederation, such as the pension fund of the Confederation or the pension fund of the SNB, are no longer exempt of negative interest. Consequently, only the account holders of the national social security system (AVS/IV/EO, IV/AI and EO/APG) are still fully exempt. However, this decision doesn’t change the rule for domestic banks as the “20 times minimum reserve requirement” still holds. Total sight deposits of domestic banks at the SNB increased of CHF1.4bn over the previous week while 20x the minimum requirement corresponds to CHF290bn.

What is next?

The SNB is running out of solution and is struggling to stop the appreciation of the Swiss franc as the ECB buys EUR60bn of bonds every month, in an attempt to boost Eurozone’s economy, which has drag the euro lower. The most powerful tool left is the exemption threshold; so far it is set to 20 times the minimum reserve requirement but the Bank could lower this threshold to increase the sight deposits exposed to negative rates. This move would force domestic banks to transfer these costs to retail deposits or to start chasing higher returns abroad. Other solutions would be to lower interest rates further into negative territory or to intervene in the foreign exchange market. We believe that the last two solutions are unlikely as the recent monetary actions suggest that the SNB is reluctant to increase massively its balance sheet. A solution may come from the Eurozone. In case of Greece and the Eurozone finally reach an agreement, foreign investors may stop avoiding European assets.

All in all, we don’t think that yesterday’s move will fundamentally change the EUR/CHF situation, especially as the resulting policy has marginally changed. The main goal was to remind traders that the SNB is not pleased by the current valuation of the Swiss franc. The focus, therefore, remains on the Greek situation and ECB bonds buying program. We expect the EUR/CHF to erase previous gains and decline towards the parity.