Santa Cruz Center for International Economics

Using a unique dataset that covers 100% of the Brazilian FX retail market, this paper contributes to the microstructure approach to exchange rates in at least four ways. First, we find a strict link between currency flows in the FX market and the Balance of Payments. Second, we develop an identication strategy in order to properly estimate the effect of customer order fl?ows on the exchange rate and ?find that dealers from the Brazilian FX market charge a premium of 0.03% in order to provide US$ 10 million of overnight liquidity. Third, we identify the nature of the feedback trading as "stabilizing"?: a 1% depreciation rate decreases the financial customer fl?ow by US$ 111 million and the commercial fl?ow by US$ 46 million. Finally, we find that the central bank sells in average US$ 28 million for each 1% depreciation in the exchange rate (lean-against-the-wind), and US$ 23 million for US$ 100 million of financial customer flow (liquidity provision).