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Order Flow and the Real: Indirect Evidence of the Effectiveness of Sterilized Interventions

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  • Emanuel Kohlscheen

Abstract

This study presents indirect evidence of the effectiveness of sterilized interventions in Brazil based on the complete records of daily customer order flow data reported by Brazilian dealers as well as foreign exchange intervention data over a time span of 10 years (2002-2011). We find that the effect of USD sales by end-users on the BRL/USD was much stronger on days in which the BCB did not intervene in the spot foreign exchange market. The regressions suggest that a 1% appreciation of the Real would have required the sale of 2.0 bn USD by final customers on days in which the Central Bank refrained from intervening. This compares to required sales of 5.5 bn USD on days in which the Central Bank was present in the market. This large effect, in spite of the fact that the median intervention amounted to only 140 mn USD, can be interpreted as evidence for the indirect damping channel. Furthermore, we find that order flows coming from outside of the financial sector have a (considerably) stronger effect on the BRL/USD exchange rate than those coming from financial customers. We argue that some studies may have failed to find significant effects of BCB interventions due to a problem of reverse causality, as in a regime of discretionary interventions the decision to intervene is often taken during trading hours.

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  • Emanuel Kohlscheen, 2012. "Order Flow and the Real: Indirect Evidence of the Effectiveness of Sterilized Interventions," Working Papers Series 273, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:273
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    1. Emanuel Kohlscheen, 2014. "Long‐Run Determinants Of The Brazilian Real: A Closer Look At Commodities," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 19(4), pages 239-250, October.
    2. Jaroslava Durčáková & Ondřej Šíma, 2013. "BRICS: Exchange Rate policy in Context of Internal and External Equilibrium [BRICS: Kurzová politika Brazílie v kontextu vnitřní a vnější rovnováhy]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2013(4), pages 7-29.
    3. Ken Miyajima & Carlos Montoro, 2013. "Impact of foreign exchange interventions on exchange rate expectations," BIS Papers chapters, in: Bank for International Settlements (ed.), Sovereign risk: a world without risk-free assets?, volume 73, pages 39-54, Bank for International Settlements.
    4. Nuttathum Chutasripanich & James Yetman, 2015. "Foreign exchange intervention: strategies and effectiveness," BIS Working Papers 499, Bank for International Settlements.
    5. Catalán-Herrera, Juan, 2016. "Foreign exchange market interventions under inflation targeting: The case of Guatemala," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 42(C), pages 101-114.
    6. Marcio Garcia & Marcelo Medeiros & Francisco Eduardo de Luna e Almeida Santos, 2014. "The impact of macroeconomic announcements in the Brazilian futures markets," Textos para discussão 623, Department of Economics PUC-Rio (Brazil).
    7. Martín Tobal & Renato Yslas, 2018. "Two Models of FX Market Interventions: The Cases of Brazil and Mexico," Investigación Conjunta-Joint Research, in: Alberto Ortiz-Bolaños (ed.), Monetary Policy and Financial Stability in Latin America and the Caribbean, edition 1, volume 1, chapter 7, pages 221-257, Centro de Estudios Monetarios Latinoamericanos, CEMLA.
    8. 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.
    9. Calebe de Roure & Steven Furnagiev & Stefan Reitz, 2015. "The microstructure of exchange rate management: FX intervention and capital controls in Brazil," Applied Economics, Taylor & Francis Journals, vol. 47(34-35), pages 3617-3632, July.
    10. João Barata Ribeiro Blanco Barroso, 2018. "Realized Volatility as an Instrument to Official Intervention," Investigación Conjunta-Joint Research, in: Alberto Ortiz-Bolaños (ed.), Monetary Policy and Financial Stability in Latin America and the Caribbean, edition 1, volume 1, chapter 8, pages 259-281, Centro de Estudios Monetarios Latinoamericanos, CEMLA.
    11. Adriana Soares Sales & João Barata Ribeiro Blanco Barroso, 2012. "Coping with a Complex Global Environment: a Brazilian perspective on emerging market issues," Working Papers Series 292, Central Bank of Brazil, Research Department.
    12. Miguel Fuentes & Pablo Pincheira & Juan Manuel Julio & Hernán Rincón & Santiago García-Verdú & Miguel Zerecero & Marco Vega & Erick Lahura & Ramon Moreno, 2014. "The effects of intraday foreign exchange market operations in Latin America: results for Chile, Colombia, Mexico and Peru," Borradores de Economia 849, Banco de la Republica de Colombia.
    13. Viola, Alessandra Pasqualina & Klotzle, Marcelo Cabus & Pinto, Antonio Carlos Figueiredo & da Silveira Barbedo, Claudio Henrique, 2019. "Foreign exchange interventions in Brazil and their impact on volatility: A quantile regression approach," Research in International Business and Finance, Elsevier, vol. 47(C), pages 251-263.
    14. João Barata R. B. Barroso, 2014. "Behavioral Models of the Foreign Exchange Market: is there any empirical content?," Working Papers Series 364, Central Bank of Brazil, Research Department.
    15. Madhusudan Mohanty & Bat-el Berger, 2013. "Central bank views on foreign exchange intervention," BIS Papers chapters, in: Bank for International Settlements (ed.), Sovereign risk: a world without risk-free assets?, volume 73, pages 55-74, Bank for International Settlements.
    16. Santos, Francisco Luna & Garcia, Márcio Gomes Pinto & Medeiros, Marcelo Cunha, 2016. "The High Frequency Impact of Macroeconomic Announcements in the Brazilian Futures Markets," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 36(2), November.

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