EUR/CHF … was 1.2000 breached? via ForexLive

Bloomberg is carrying an interesting little item … titled: SNB Says Franc Cap Guaranteed at All Times, No Breach on Dec. 25

Here is the report, verbatim (I've broken up the sentences to make it more easily readable, but with no subtraction or addition)… bolding is mine:

Swiss National Bank comments on media reports that franc cap was breached “very briefly.”

“Minimum exchange rate of 1.20 francs/euro was and is guaranteed over the holidays at all times,” Swiss National Bank spokesman Walter Meier says in e-mailed statement.

“In the past, the Swiss National Bank has repeatedly pointed out that for the ascertainment of the exchange rate professional currency trading between banks, i.e., the so-called interbank market is decisive.

On the interbank market the lowest traded price was above the minimum exchange rate on Christmas Day.

The exchange rates mentioned in the media are non-binding price indications which individual banks offer their customers.

That is why the cited data don't in any way show that on the interbank market transactions took place that were under 1.20 francs/euro. The minimum exchange rate was not breached at any time.”

NOTE: Earlier, AWP says exchange rate yday was briefly 1.1989 francs/euro

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OK, just a few notes:

• AWP referred to is awp Finanznachrichten AG, a Swiss business news agency based in Zurich, Switzerland

The AWP report said (I've used Google translate, bolding mine):

• The Swiss franc remains in the currency markets , despite the introduction of negative interest rates by the Swiss National Bank ( SNB) under strong upward pressure . On Christmas Day , the euro has slipped briefly just below the defined by the SNB lower limit of 1.20 CHF . According to market data has reached quotations from 1.1989 CHF in the early afternoon of December 25 , the euro . Following the Euro exchange rate has risen to the listing of 1.2024 CHF and has been able to maintain it at over 1.2020 CHF since then .

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OK, so you'll need to put together what the AWP report says, i.e.

• According to market data has reached quotations from 1.1989 CHF in the early afternoon of December 25

with how the spokesman from the SNB responded …

• The exchange rates mentioned in the media are non-binding price indications which individual banks offer their customers.  That is why the cited data don't in any way show that on the interbank market transactions took place that were under 1.20 francs/euro

If you are new to the Forex market, or just unfamiliar with how it is structured, this may be confusing.

Lets break it down.

Foreign exchange is, when all is said is done, an exchange of one currency for another at a rate  agreed to by two counterparties.There is no central exchange where rates are set, the two counterparties are free to agree to whatever rate they wish to get an exchange done.

Try this as an experiment. Grab some cash and head out to the nearest international airport, or perhaps to a large hotel in your nearest city. Approach a tourist from another country and offer to exchange the cash you have (in local currency) for some of their foreign cash.

OK, now, you have to come to some agreement on a rate. How do you do this? You might pick a number out of the air … or you might head to ‘kiosk' where they specialise in exchanging currencies and refer to the rate they are quoting (usually displayed on some sort of board) there. Or, you might jump on your smartphone and look for some rate quoting on a broker and use that rate as the basis for your negotiation. Whatever. If you two can come to an agreement on a rate and complete a transaction, there you go …. foreign exchange. Of course, you may not come to an agreement, one or both of you may feel you can find a better deal with another counterparty and you are free to deal or not deal.

Lets say, though, that you are more interested in trading forex from home, in larger amounts than cash amounts you might carry around. You don't want the physical cash, its going to be done electronically. You'll want a better rate than you can get at a ‘kiosk', where your can exchange cash in one currency for cash in another. You might want to exchange 100,000US dollars (or whatever), for example for Swiss francs (or whatever), and you don't want to carry that sort of cash around, so you'll want to do it electronically. You might do this using a broker on the internet (for example). Where will this broker get the rate from? Chances are the broker will refer to a rate being quoted by a larger bank and quote it to you (this is a simplified version, but you get the idea). If the rate is acceptable you'll agree on the exchange with the broker (and the broker in turn will seek to trade to offset his exposure with the bank or perhaps with another customer, hopefully at a rate to give him some profit on the two deals).

Let's imagine, now, that you are an importer or exporter of goods and/or services and you need to trade in amounts larger than the example $US100,000, maybe a million USD, or 5, 10 … whatever. Or, maybe you are a manager of money, a mutual fund investing in overseas shares and you need another currency to buy those shares – maybe you need the equivalent of 50 million USD. Or, maybe you are a leveraged fund and want to trade in maybe 500 million USD. You aren't going to get a rate from a currency ‘kiosk', or even from an internet broker, you'll want to deal with a bank which can access the amount of liquidity needed to do the deal. For large amounts, large deals, you'll need to transact with a bank with access to the ‘interbank' market. The interbank market is where one bank can contact another and trade in 10, 20, 50, 100 million USD (or those sorts of amounts in whatever currencies you need to deal in, perhaps EUR/CHF). The bank you contact will quote you a rate, and if you agree the deal will be done and the bank will then seek to offset the deal into the interbank market, contacting other banks for prices in turn. To offset a 50 million USD transaction may take one deal with another bank, or maybe more than one offsetting deal (2*20 and 1*10, for example).

Like I said, this is simplified, but I hope its helpful if you are new the FX market.

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And, as Walter Meier from the SNB said re the EUR/CHF, while media reports were of EUR/CHF trading below 1.2 may well be correct (remember counterparties are free to quote whatever prices they wish and deal at whatever prices they want to agree on) he reaffirmed that the SNB views the interbank pricing as the final arbiter and EUR/CHF did not deal below 1.2 on the interbank market.

(ps. You may have noticed discrepancies in high and low prices in the comments on ForexLive sometimes. Someone will say the high was 10, someone else will come back and say, no, the high was 11, 12, or whatever. Yep – could well be, different prices can deal at different brokers.)

posted via ForexLive