* Swiss franc would rise if SNB stopped intervening
* Rate difference, E. European lending boom end boost franc
* Uncertainty about next intervention level helps SNB
By Sven Egenter
ZURICH, July 23 (Reuters) - The Swiss National Bank's game of cat and mouse with FX markets will continue for some time because the Swiss franc has still plenty of reasons to rise and the central bank has the will and the firepower to fight that.
Markets have grown more wary of SNB interventions as the central bank's tactics to foster uncertainty about intervention levels is amplifying the effect of its threat.
But the central bankers have not achieved what some analysts say they may secretly be hoping for: a significantly weaker currency to give the ailing economy a much needed boost.
"The SNB will have to threaten to intervene for quite a while," said Citigroup analyst Michael Saunders, adding the SNB may be one of the last central banks to tighten monetary policy.
The SNB pledged to stem an appreciation of the franc against the euro as part of its drastic measures launched in March -- which include rock-bottom rates and the purchase of corporate bonds -- to fight deflation and the worst recession in decades.
SNB board member Thomas Jordan indicated in early July that the SNB is ready to print and sell as many francs as needed as interventions were key to its "massive" quantitative easing.
"What they would like is the currency to weaken," Saunders said. However, the central bank may be reluctant to pursue this for fear of being accused of a "beggar-thy-neighbour" policy.
The franc hit an all-time high against the euro last autumn as investors piled money in the traditional safe haven currency in the wake of the collapse of Lehman Brothers.
At a current rate of 1.52 per euro, the franc is still 6 percent firmer than a year ago. On a trade-weighted basis, the franc has not eased at all since the launch of the intervention.
LOTS OF SUPPORT
Even as the dollar has take over some of the franc's appeal as a safe haven, the SNB will have to remain on its toes as the currency has still plenty of support.
"The franc cannot really weaken. The rate differential with the euro zone is too narrow," said Ronald Plasser, fixed income portfolio manager at Bankhaus Schelhammer & Schattera.
The spread between the three-month Swiss franc and euro LIBOR narrowed to a low of 54 basis points as the European Central Bank also cut rates to record lows; before the crisis the spread used to be between 1.5 and 2.5 percentage points.
In addition, one of the drags on the franc during the boom reversed: eastern European consumers stopped making use of low franc rates to finance houses and consumption, hit by the rising franc and a deep recession.
"That flow represented a sort of 'carry trade' against the franc, and was a capital outflow, capping the franc for a while," Citigroup's Saunders said.
Data from the Hungarian central bank for example show that new franc loans and mortgages have collapsed to just some 12 billion Hungarian forints ($62.68 million) per month this year, a 90 percent drop compared to the 2007/2008 averages.
In addition, Swiss banks cut back assets in foreign currencies at a much faster pace then liabilities, effectively going long on the franc, Saunders said. "They are de facto repatriating and this is supporting the currency."
Finally, the Swiss economy has weathered the crisis better than other export-oriented countries such as Japan or Germany as Swiss consumers have proven more resilient and Swiss pharma firms added some stability even to the hard-hit export sector.
TACTICS
Analysts acknowledge that the central bank has impressed the markets. "Measured against its objectives -- to fight an appreciation -- they have been effective," said Ian Stannard from BNP Paribas.
The central bank has kept the franc mostly in a range
between 1.50 and 1.52 and brought volatility down to levels not
seen since the early stages of crisis in 2007.
The tactics to let markets second guess intervention levels increased the SNB's efficiency. "If you defend a level, the market will attack that level," Stannard said. "If the market does not know where that level is, it will be more cautious."
Markets long considered a 1.50 per euro the SNB's line in the sand but doubts rose with the forceful intervention in June, when the central bank drove the rate up to nearly 1.54 again.
Stannard sees the critical level now at around 1.5110, while Unicredit analyst Armin Mekelburg for example bets on 1.5050.
The SNB flexed its muscle more then once and stepped up its efforts in late June as markets pushed the franc up again.
In the first quarter, the SNB's euro holdings indicate that the central bank spent some 4.5 billion euros on interventions, in the second the amount rose to nearly 12 billion euros.
"The figures are a clear signal that the SNB will keep the exchange rates stable around current levels as long as risks of deflation persist - at any price," analysts at SEB said in a note, adding: "So, don't bet against the SNB." (Editing by Andy Bruce)