Official Interventions through Derivatives: Affecting the Demand for Foreign Exchange

TLDR

Short‑term exchange‑rate forecasting may be affected by the mechanism of currency‑swap auctions. The study uses high‑frequency data to examine how Brazilian Central Bank currency‑swap auctions affect the BRL/USD spot exchange rate. Currency‑swap auctions provide foreign currency to traders seeking speculative or hedging positions, thereby influencing demand and the spot rate. Swap auctions shift the exchange rate level, with peak impact 60–70 minutes after the auction announcement and shortly after results are released, even though they do not directly alter foreign‑currency supply.

Abstract

We use high-frequency data to study the effects of currency swaps auctions by the Brazilian Central Bank on the BRL/USD spot exchange rate. We find that official currency swap auctions impact the level of the exchange rate, even though they do not directly alter the supply of foreign currency in the market. The maximum impact occurs 60 to 70 minutes after the initial official announcement of an auction, and typically shortly after the results of the auctions are made public. The official supply of currency swaps to the market provides an alternative for traders that demand foreign currency for financial (speculative or hedging) rather than transactional reasons, and thus affects the demand for foreign currency and its price. This mechanism is likely to be particularly relevant when forecasters extrapolate exchange rate trends at short-term horizons.