Abstract

We study the impact of unanticipated foreign exchange (FX) intervention in the Brazilian market. Our identification exploits over 20 years of announcements of Brazilian Central Bank (BCB) at an intra-day (tick-level) frequency since 2000. We combine our auction data with intra-day spot and futures prices. We find that surprise sales of USD reserves by the BCB results in an appreciation of the Brazilian Real (BRL) and an increase in domestic short-term interest rates, supporting the signalling channel of FX interventions. We then test efficiency in the FX market by measuring the impact on covered interest rate parity (CIP). Surprise sales of USD reserves reduces the magnitude of CIP violations. Our results are consistent with dollar liquidity provision by the central bank reducing the relative cost of borrowing dollars via FX forward and swap markets, improving efficiency.

Keywords: Exchange Rate; Central Bank; Interventions; Yield Curve; Asset pricing

JEL Classifications: E44; E58; F31; G14