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Order Flow in the South: Anatomy of the Brazilian FX Market

Abstract

This paper explores a unique dataset that contains 100% of the customer áows from domestic dealers in the Brazilian FX retail market. We present two sets of results. First, we Önd a strict link between currency áows from the FX market and the Balance of Payments. Second, we examine the long-run and short-run behaviors of each of the main players in the FX market. Our VECM estimates show that while the commercial customer áow is negatively related to exchange rate trend, the Önancial and the central bank intervention customer áows are positively related to exchange rate deviations from the long run trend. Our impulse response function also show that dealers charge a premium in order to provide unexpected overnight liquidity; that customers have "stabilizing" feedback trading; and that the central bank not only provides liquidity but also leans-against-the-wind when intervening.

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