FX Intervention to Stabilize or Manipulate the Exchange Rate? Inference from Profitability

June 12, 2020

Preview Citation

Format: Chicago

Damiano Sandri. FX Intervention to Stabilize or Manipulate the Exchange Rate? Inference from Profitability, (USA: International Monetary Fund, 2020) accessed September 19, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We analyze the profitability of FX swaps used by the central bank of Brazil to shed light on the rationale for FX intervention. We find that swaps are profitable in expectation, suggesting that FX intervention is used to stabilize the exchange rate in the face of temporary excessive movements rather than to manipulate it away from fundamental values. In line with this interpretation, we find that the scale of FX intervention responds to the degree of exchange rate misalignment relative to UIP conditions. We also document that intervention is more aggressive when there is less uncertainty about the medium-term level of the exchange rate and when the exchange rate is overvalued rather than undervalued.

Subject: Currency swaps, Exchange rate forecasting, Exchange rates, Financial services, Foreign exchange, Interest rate parity

Keywords: Core swap action, Currency swaps, Exchange rate, Exchange rate forecasting, Exchange rate movement, Exchange rates, Expected return, FX intervention, FX intervention in Brazil, FX reserve, FX swap, Interest rate parity, Long position, Profitability, Swap auction, Swap profitability, Swap return, Swap sale, WP

Publication Details

Pages:

24
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/090
Stock No:

WPIEA2020090
ISBN:

9781513547664
ISSN:

1018-5941

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