Official Interventions through Derivatives: affecting the demand for foreign exchange

Emanuel Kohlscheen and Sandro Andrade

No 317, Working Papers Series from Central Bank of Brazil, Research Department

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.

Date: 2013-07
New Economics Papers: this item is included in nep-ifn and nep-mst
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