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Foreign Exchange

SNB affirms commitment to EURCHF floor; has FX market “almost completely covered”

Thomas Jordan, acting chairman of the Swiss National Bank, has restated the central bank’s commitment to maintaining the SFr1.20 floor in EURCHF, which was briefly breached last week.

During a press briefing in Zurich, Jordan said the fact that a few individual transactions took place at less than SFr1.20 last Thursday had prompted some to doubt the SNB’s resolve to enforce the minimum exchange rate in EURCHF. “Right from the start I want to make it quite clear such doubts are misplaced,” he said. “The Swiss National Bank is enforcing the minimum exchange rate with all the means at its disposal. We are prepared to buy foreign currency in unlimited quantities for this purpose. In this respect, our policies are totally unchanged.”

Jordan conceded that despite offers to sell the franc being placed in trading systems by the SNB, a few isolated transactions occurred below SFr1.20.

Indeed, he said that the SNB could not cotrol the franc market completely, adding such anomalies "cannot always be excluded".

Jordan maintained, however, that at no point did the best available euro exchange rate fall below the floor.

“For a short time, what is known as a segmented market could be observed, in which transactions below the best price were concluded,” he said. “This situation was remedied within a very few seconds, however, by means of arbitrage.”

The trades below SFr1.20 were concluded by banks that did not have credit lines with the SNB, Jordan said – in other words banks that could not or did not wish to trade with the central bank.

“The SNB was at all times prepared to buy unlimited quantities of euros at SFr1.20 per euro,” he said. “All market participants were at all times aware of this SNB purchase offer, including the banks without an agreement relating to limits.”

Almost completely covered

The SNB said that since the implementation of the floor in September, it had monitored the FX market from the open in Asia on Sunday evening to the market close in New York on Friday without interruption.

The central bank said it accepted well over 100 banks with more than 700 trading desks as counterparties.

“Thanks to this network of contacts, the global foreign exchange market is almost completely covered,” said Jordan. “The SNB’s strategy for implementing the minimum exchange rate has proved effective – including in the last few days.”

Jordan maintained that the Swiss franc was still overvalued, a situation that was a substantial challenge for the Swiss economy, adding that the SNB expected the franc to weaken and that it was prepared to take further measures to ward off deflation.

Some expect the SNB to be tested further, however, particularly as signs of renewed concerns over eurozone peripheral debt and escalating tensions over Iran could fuel further haven demand for the franc.

Coinciding with this have been signs – such as figures last week that Swiss CPI rose at twice the rate expected in March – that the Swiss economy is coping with the strength of the franc. This might well have encouraged franc bulls to test the SNB.

Indeed, some observers said it was telling that Jordan felt the need to clarify how it was possible that some trades occurred under the SNB’s EURCHF floor.

Simon Smith, chief economist at FxPro, said it was true that the FX market was not perfect and remained an over-the-counter market in which there was no central exchange to bring together buyers and sellers. “But this breach, setting aside the technicalities and together with the fact that the SNB is currently without a permanent president, means that the central bank is under increased pressure – more than would be the case otherwise – to successfully defend the level on a continuous basis.”

In addition, Smith said, the fact that EURCHF has traded within 1% of SFr1.20 for nearly all of this year underlined the fact that economic fundamentals were not in the SNB’s favour and that the central bank’s efforts to rein in the franc were not without cost.

As Smith says, otherwise the SNB would use intervention to take EURCHF a safe distance away from its SFr1.20 floor.

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