An Intraday Analysis of the Effectiveness of Foreign Exchange Intervention

This paper assesses the effectiveness of Canada's official foreign exchange intervention in moderating intraday volatility of the Can$/US$ exchange rate, using a 2-1/2-year sample of 10-minute exchange rate data. The use of high frequency data (higher than daily frequency) should help in assessing the impact of intervention since the foreign exchange market is efficient and reacts rapidly to new information. The estimated equations explain volatility in terms of four major factors: intraday seasonal pattern; daily volatility persistence; macroeconomic news announcements; and the impact of central bank intervention. Rule-based (or expected) intervention apparently had no direct impact on the reduction of foreign exchange volatility, although the existence of a non-intervention band seemed to provide a small stabilizing influence. This result is interpreted to mean that the stabilizing effect of expected intervention came into play as the Canadian dollar approached the upper or lower limits of the band. When the dollar exceeded the band, actual intervention did not have any direct impact because it was expected. Moreover, the results show that discretionary (or unexpected) intervention might have been effective in stabilizing the Canadian dollar, although the impact of an intervention sequence diminished as it increased beyond a few days.