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Official Interventions through Derivatives: affecting the demand for foreign exchange

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  • Emanuel Kohlscheen
  • Sandro C. Andrade

Abstract

We use high-frequency data to study the effects of currency swaps auctions by the Brazilian Central Bank on the BRL/USD spot exchange rate. We find that official currency swap auctions impact the level of the exchange rate, even though they do not directly alter the supply of foreign currency in the market. The maximum impact occurs 60 to 70 minutes after the initial official announcement of an auction, and typically shortly after the results of the auctions are made public. The official 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

  • Emanuel Kohlscheen & Sandro C. Andrade, 2013. "Official Interventions through Derivatives: affecting the demand for foreign exchange," Working Papers Series 317, Central Bank of Brazil, Research Department.
  • Handle: RePEc:bcb:wpaper:317
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    File URL: http://www.bcb.gov.br/pec/wps/ingl/wps317.pdf
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    Cited by:

    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.
    2. Jaqueline Terra Moura Marins & Gustavo Silva Araujo & José Valentim Machado Vicente, 2015. "As Atuações Cambiais do Banco Central Afetam as Expectativas de Mercado?," Working Papers Series 393, Central Bank of Brazil, Research Department.
    3. repec:eee:intfor:v:33:y:2017:i:3:p:707-728 is not listed on IDEAS
    4. International Monetary Fund, 2015. "Brazil; Selected Issues Paper," IMF Staff Country Reports 15/122, International Monetary Fund.
    5. Jaroslava Durčáková & Ondřej Šíma, 2013. "BRICS: Exchange Rate policy in Context of Internal and External Equilibrium," Český finanční a účetní časopis, University of Economics, Prague, vol. 2013(4), pages 7-29.
    6. repec:eee:inecon:v:108:y:2017:i:c:p:157-168 is not listed on IDEAS
    7. Chamon, Marcos & Garcia, Márcio & Souza, Laura, 2017. "FX interventions in Brazil: A synthetic control approach," Journal of International Economics, Elsevier, vol. 108(C), pages 157-168.
    8. Machado, Vicente da Gama & Portugal, Marcelo Savino, 2014. "Measuring inflation persistence in Brazil using a multivariate model," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 68(2), June.
    9. João Barata R. B. Barroso, 2014. "Realized Volatility as an Instrument to Official Intervention," Working Papers Series 363, Central Bank of Brazil, Research Department.
    10. Tobal Martín & Yslas Renato, 2016. "Two Models of FX Market Interventions: The Cases of Brazil and Mexico," Working Papers 2016-14, Banco de México.
    11. Gaglianone, Wagner Piazza & Marins, Jaqueline Terra Moura, 2017. "Evaluation of exchange rate point and density forecasts: An application to Brazil," International Journal of Forecasting, Elsevier, vol. 33(3), pages 707-728.
    12. Wagner Piazza Gaglianone & Jaqueline Terra Moura Marins, 2014. "Risk Assessment of the Brazilian FX Rate," Working Papers Series 344, Central Bank of Brazil, Research Department.

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