Swiss central bank interim chief Thomas Jordan said the bank will continue to enforce the limit of 1.20 francs per euro after temporary breaches of the ceiling raised doubts about its willingness to defend it.
“The Swiss National Bank is enforcing the minimum exchange rate with all the means at its disposal,” Jordan told reporters at a press briefing today. “We are prepared to buy foreign currency in unlimited quantities for this purpose. In this respect, our policies are totally unchanged.”
The Swiss currency on April 5 breached the limit for the first time since the measure was introduced seven months ago, reaching 1.19995. Jordan today said that the trade occurred in “what is known as a segmented market” and that the situation “was remedied within very few seconds, however, by means of arbitrage.”
“The SNB cannot fully control the market,” David Kohl, deputy chief economist at Julius Baer Group in Frankfurt, said by telephone. “Given the high market transparency, small deviations from the ceiling immediately attract attention.”
The franc was little changed after Jordan’s remarks and traded at 1.2026 at 2:12 p.m. in Zurich, above the level it was before the first breach occurred. Against the dollar, it traded at 91.68 centimes.
‘Below Best Price’
In the foreign exchange market, the SNB accepts more than 100 banks with more than 700 trading desks as counterparties, according to the SNB statement. “Thanks to this network of contacts, the global foreign exchange market is almost completely covered.”
The exchange rates below 1.20 francs per euro were set by banks which don’t have such an agreement with the SNB, constituting a market in which trades “below the best price were concluded”, the SNB said.
The SNB was at all times prepared to buy unlimited quantities of euros at 1.20 francs per euro. “All market participants were at all times aware of this SNB purchase offer, including the banks without an agreement” with the central bank, Jordan said.
“Consequently, banks which sold euros for less than 1.20 francs did not receive the best market price and had -- relatively speaking -- to accept losses,” he said.
The SNB interim chairman declined to give reasons when asked why market participants would sell the euro at less than what the SNB was offering.
“We can’t say these market anomalies won’t happen again,” Jordan said. “However, they can only be maintained for a very short period.”
The SNB introduced its limit on Sept. 6 to fight deflation threats and help Swiss exporters. Since then, the central bank’s governing board members have repeatedly stressed their resolve to defend the ceiling, saying that the franc is overvalued.