Currency and all markets are in transition stages from Libor elimination to adopt and implement risk free interest rates. The new interest rates represent a floor to overall interest rates however the common theme among central banks is creation of compound interest rate indices as in SOFR for the FED, Sonia for the BOE, AONIA for the RBA, NZONIA for the RBNZ.
Japanese Call Rates so far remains as is without adjustment. The SNB appears so far without adjustment however the SNB’s current system of interest rates is a sound and beautiful system as no need exists to change. Minor adjustments were implemented to Saron swap rates without changes to daily CHF currency prices.
The BOC falls into the same category as the SNB as Corra was already constructed as an index. and no changes required, particularly as Canada’s Overnight Money Market Finance Rate serves as the Floor to Corra.
The ECB however is in transition from Eonia to the new replacement STIR interest rate. Eonia once represented an interest rate top and STIR becomes an interest rate floor.
The key word is floor as the new interest rate location is below daily overnight rates but floor also means interest rates never trade to 0 or negative, particularly Treasury bonds at the short end of the curve. The purpose of the new interest rate is to create a new overnight borrow rate to offer treasuries or any nation’s bonds as collateral. Daily overnight rates in past decades represented the borrow rate.
While Fed Funds trades 0.07, SOFR traded 0.01 since March, the SOFR index 30 day average is located at 0.01000, the 90 day average at 0.02167 and 180 day average at 0.05101. The interest rate then trades 1.01, 1.0267, and 1.05101. All trade below Fed Funds as the new Floor rate.
The ECB STIR rate at -0.566 or 0.434 matches against Eonia at -0.481 or 0.519. STIR as the lower rate trades below Eonia as the floor rate.
The STIR rate is then compounded in the Index at -0.56474, -0.56617, -0.56426,-0.56118 and -0.5539. Rates above represent the new EUR/USD pricing scheme to trade in the future as Eonia transition completes.
Below is the STIR rate calculated to pre 2019. Vital is 2019 onward.
Weds 29 July 2020 0.25% 242.277178142510
Thurs 30 July 2020 0.25% 242.278837575237
The current Index price is 242.732286.
The Greatest changes so far is to EUR and DXY by adding an extra interest rate to the price path only forces slower price speeds as a price path must contend with a new interest rate to act as a new support or resistance point.
An exchange rate is a glorified interest rate operating in traded markets under a different name and number.