UBS are out with a client note on EUR/CHF … “SNB: Magic Words Failing”.

UBS’s conclusions (bolding mine):

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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And, one more thing, this from the body of the report … again, bolding mine:

Very few, if any, traders in the market appear to have been willing to take positions against the SNB. On the contrary, speculative flow has largely been supporting the minimum exchange rate. We believe this is because the credibility both of the central bank and of the floor has remained strong. Indeed, the SNB could hardly have been clearer in their recent communication, noting for example in the September quarterly assessment that the economic outlook had ‘deteriorated considerably’ and that the ‘risk of deflation’ had increased. It seems clear that under these circumstances the minimum exchange rate remains critical to the SNB’s monetary policy stance and that it would be defended with ‘utmost determination’.