The Bank of Canada, on behalf of the Government of Canada, conducts sterilized foreign exchange intervention to promote orderly markets for the Canadian dollar. The purpose is to slow movements in the exchange rate, working on the presumption that volatility in financial markets might adversely affect financial and economic conditions. Recent evidence, however, suggests that intervention might not be very successful at moderating fluctuations of the Canadian dollar. 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.
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