SNB likely on hold for now; but lackluster performance in EUR-CHF adds pressure to act

The SNB is likely to maintain the Libor target rate unchanged in its meeting this Thursday. However, the recent developments on the domestic-price front and EUR-CHF must have been perceived as very unwelcome by the central bank.

Hence, there is a growing risk that the SNB may take decisive action and cut rates further into negative territory this week.

Such a surprise move could see EUR-CHF spiking higher towards 1.10 in the aftermath and maintain an appreciating trend, as the central bank would send a stronger signal that - following the removal of the floor in January - it still considers the exchange rate as the key variable in fighting deflation.

Unicredit notes..

• If the SNB stays pat, we suspect that it will step up its FX rhetoric by highlighting that the size of CHF overvaluation has increased considerably and that it stands ready to intervene to ensure this misalignment corrects in the foreseeable future so as to alleviate negative developments on the price front. 
  
  
• This would put EUR-CHF under some upside pressure, but if the market fails to drive the exchange rate meaningfully and sustainably higher over the next few months, we think that the central bank will be forced to cut later (potentially between scheduled meetings).