Itaú BBA - Interventions in the Brazilian FX Market: An Empirical Investigation of the Determinants

Working papers

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Interventions in the Brazilian FX Market: An Empirical Investigation of the Determinants

mayo 16, 2013

What are the variables that led the central bank to intervene in the foreign exchange market?

Dear client,

Please find below our working paper “Interventions in the Brazilian Foreign Exchange Market: An Empirical Investigation of the Determinants”, by Gabriela Fernandes.

This is the ninth edition of our “Itaú Unibanco Working Paper Series”. This series intends to publish in-depth studies, adding to discussions about local and global economic or financial themes. At the same time, the objective is to strengthen the bank’s analyses and participation in the public debate.

Sincerely,
Ilan Goldfajn
Chief Economist


Foreign Exchange Market: An Empirical Investigation of the Determinants

Gabriela Fernandes*

May 2013

Abstract

Since the adoption of the floating exchange-rate regime in 1999, the Brazilian Central Bank (BCB) has intervened several times in the foreign exchange market, buying and selling dollars in the spot, futures and derivatives markets. What are the variables that led the central bank to intervene in the foreign exchange market? In our investigation of this question, we find that the behavior of some variables – including, among others, the risk premium, the deviations of the realfrom its prior trend, comparison of the performance of the realwith that of similar currencies, the volatility of markets and of the exchange rate itself – strongly influence the likelihood of BCB intervention in FX. We also conclude that the monetary authority acts in “blocks”, and that the fact that it had intervened the day before increases the likelihood of a new intervention. We also note that the BCB interventions (“reaction function”) change over time, in accordance with different macroeconomic scenarios and administrations.

* Economist - Itaú Macro Research Team



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