This presentation by Ganesh Viswanath Natraj (Warwick University) is on Foreign Exchange Interventions, Signalling and Intermediation Constraints.
While there is extensive empirical literature on foreign exchange intervention (FXI) and its impact on currency markets, the effect of FXI during periods of constrained USD liquidity supply by global intermediaries is less explored.
This research tests the dollar intermediation channel on how intermediation constraints amplify FXI impact. It is a Brazilian case study, which uses a comprehensive database on Brazilian Central Bank (BCB) FXI to test its impact on spot rates and Covered Interest Rate Parity (CIP) deviations. The findings consistent with a simple model of FXI on dollar intermediation and how it has more impact during periods of tight intermediary constraints.
This research asks the following questions: ‘How does FXI impact spot rates, particularly during periods of tight intermediary constraints? What is the influence of unanticipated FXI on cross-border funding, measured by CIP deviations? Are the effects of FXI more pronounced during periods of tight intermediary constraints? And which channel is quantitatvely more important, the portfolio balance or signaling channels?’
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