Foreign exchange market intervention in two small open economies: the Canadian and Australian experience

We examine intervention by the Bank of Canada and the Reserve Bank of Australia for daily data from 1989 to 1998. Both central banks intervene in response to excessive exchange rate volatility and uncertainty. Volatility is the implied volatility of foreign currency futures options. Uncertainty is the kurtosis of the implied risk-neutral probability density functions. We also examine the impact of inflation targets. Unlike other studies we also consider commodity futures prices. These turn out to help explain the effectiveness of intervention. Central bank intervention was largely unsuccessful in both countries though volatility and kurtosis were modestly affected.