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Order Flow in the South: Anatomy of the Brazilian FX Market

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  • Wu, Thomas

Abstract

Using a unique dataset that covers 100% of the Brazilian FX retail market, this paper contributes to the microstructure approach to exchange rates in at least four ways. First, we find a strict link between currency flows in the FX market and the Balance of Payments. Second, we develop an identication strategy in order to properly estimate the effect of customer order fl?ows on the exchange rate and ?find that dealers from the Brazilian FX market charge a premium of 0.03% in order to provide US$ 10 million of overnight liquidity. Third, we identify the nature of the feedback trading as "stabilizing"?: a 1% depreciation rate decreases the financial customer fl?ow by US$ 111 million and the commercial fl?ow by US$ 46 million. Finally, we find that the central bank sells in average US$ 28 million for each 1% depreciation in the exchange rate (lean-against-the-wind), and US$ 23 million for US$ 100 million of financial customer flow (liquidity provision).

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Bibliographic Info

Paper provided by Center for International Economics, UC Santa Cruz in its series Santa Cruz Center for International Economics, Working Paper Series with number qt1k2250wj.

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Date of creation: 07 Nov 2006
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Handle: RePEc:cdl:scciec:qt1k2250wj

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  1. Geir Høidal Bjønnes & Dagfinn Rime & Haakon O. Aa. Solheim, 2004. "Liquidity provision in the overnight foreign exchange market," Discussion Papers 391, Research Department of Statistics Norway.
  2. Dominguez, Kathryn M.E., 2006. "When do central bank interventions influence intra-daily and longer-term exchange rate movements?," Journal of International Money and Finance, Elsevier, vol. 25(7), pages 1051-1071, November.
  3. Evans, Martin D. & Lyons, Richard K., 1999. "Order Flow and Exchange Rate Dynamics," Research Program in Finance, Working Paper Series qt0dh1c16w, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley.
  4. Lyons, Richard K., 1997. "A simultaneous trade model of the foreign exchange hot potato," Journal of International Economics, Elsevier, vol. 42(3-4), pages 275-298, May.
  5. M. Beine & A. Bénassy-Quéré & E. Dauchy & R. MacDonald, 2002. "The Impact of Central Bank Intervention on Exchange-Rate Forecast Heterogeneity," THEMA Working Papers 2002-22, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  6. Carol L. Osler, 2003. "Currency Orders and Exchange Rate Dynamics: An Explanation for the Predictive Success of Technical Analysis," Journal of Finance, American Finance Association, vol. 58(5), pages 1791-1820, October.
  7. Payne, Richard & Vitale, Paolo, 2001. "A Transaction Level Study of the Effects of Central Bank Intervention of Exchange Rates," CEPR Discussion Papers 3085, C.E.P.R. Discussion Papers.
  8. Payne, Richard, 2003. "Informed trade in spot foreign exchange markets: an empirical investigation," Journal of International Economics, Elsevier, vol. 61(2), pages 307-329, December.
  9. Harald Hau & Helene Rey, 2002. "Exchange Rate, Equity Prices and Capital Flows," NBER Working Papers 9398, National Bureau of Economic Research, Inc.
  10. Hasbrouck, Joel, 1991. "The Summary Informativeness of Stock Trades: An Econometric Analysis," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 571-95.
  11. Geir Hoidal Bjonnes & Dagfinn Rime, 2003. "Dealer Behavior and Trading Systems in Foreign Exchange Markets," Working Paper 2003/10, Norges Bank.
  12. Kenen,Peter B., 2000. "The International Economy," Cambridge Books, Cambridge University Press, number 9780521644358, October.
  13. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
  14. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
  15. Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16.
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Cited by:
  1. Esen Onur, 2008. "The role of asymmetric information among investors in the foreign exchange market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(4), pages 368-385.

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