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Official FX interventions through derivatives

Author

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  • Kohlscheen, Emanuel
  • Andrade, Sandro C.

Abstract

We use high-frequency data to study the effects of currency swap auctions carried out by the Brazilian Central Bank on the USDBRL exchange rate. We find that official currency swap auctions impact the exchange rate in a significant way, even though they do not directly alter the supply of foreign currency in the market. We show that during our sample period auctions of contracts in which the Central Bank took a short position in USD had larger effects than those in which the Central Bank took a long position. The supply of currency swaps to the market provides an alternative for traders that demand foreign currency for financial (speculative or hedging) rather than transactional reasons, and thus affects the demand for foreign currency and its price. This mechanism is likely to be particularly relevant when forecasters extrapolate exchange rate trends at short-term horizons.

Suggested Citation

  • Kohlscheen, Emanuel & Andrade, Sandro C., 2014. "Official FX interventions through derivatives," Journal of International Money and Finance, Elsevier, vol. 47(C), pages 202-216.
  • Handle: RePEc:eee:jimfin:v:47:y:2014:i:c:p:202-216
    DOI: 10.1016/j.jimonfin.2014.05.023
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    References listed on IDEAS

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    1. Santos, Francisco Luna & Garcia, Márcio Gomes Pinto & Medeiros, Marcelo Cunha, 2015. "Price Discovery in Brazilian FX Markets," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 35(1), October.
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    Citations

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    Cited by:

    1. Barbone Gonzalez, Rodrigo & Khametshin, Dmitry & Peydró, José Luis & Polo, Andrea, 2018. "Hedger of Last Resort: Evidence from Brazilian FX Interventions, Local Credit and Global Financial Cycles," CEPR Discussion Papers 12817, C.E.P.R. Discussion Papers.
    2. Park, Ki Young & Kim, Soohyon, 2019. "Detecting currency manipulation: An application of a state-space model with Markov switching," Japan and the World Economy, Elsevier, vol. 49(C), pages 50-60.
    3. Biswajit Banerjee & Juraj Zeman & Ľudovít Ódor & William O. Riiska, 2018. "On the Effectiveness of Central Bank Intervention in the Foreign Exchange Market: The Case of Slovakia, 1999–2007," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 60(3), pages 442-474, September.
    4. Dietrich Domanski & Emanuel Kohlscheen & Ramon Moreno, 2016. "Foreign exchange market intervention in EMEs: what has changed?," BIS Quarterly Review, Bank for International Settlements, September.
    5. Robert Neil McCauley & Chang Shu, 2016. "Non-deliverable forwards: impact of currency internationalisation and derivatives reform," BIS Quarterly Review, Bank for International Settlements, December.
    6. Milan Nedeljkovic & Christian Saborowski, 2019. "The Relative Effectiveness of Spot and Derivatives‐Based Intervention," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(6), pages 1455-1490, September.
    7. Christian Upper & Marcos Valli, 2016. "Emerging derivatives markets?," BIS Quarterly Review, Bank for International Settlements, December.
    8. Bank for International Settlements, 2017. "Foreign exchange liquidity in the Americas," BIS Papers, Bank for International Settlements, number 90, June.
    9. Yavuz Arslan & Carlos Cantú, 2019. "The size of foreign exchange reserves," BIS Papers chapters, in: Bank for International Settlements (ed.), Reserve management and FX intervention, volume 104, pages 1-23, Bank for International Settlements.
    10. Atilgan, Yigit & Demirtas, K. Ozgur & Simsek, Koray D., 2016. "Derivative markets in emerging economies: A survey," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 88-102.

    More about this item

    Keywords

    Intervention; Exchange rate; Derivatives; Brazil;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General

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