The Intraday Effects of Central Bank Intervention on Exchange Rate Spreads

We investigate the intraday effects of intra-marginal intervention in a horizontal band on the exchange rate spread. Official intraday data on Danish intervention transactions in the ERM II, the Exchange Rate Mechanism of the European Union, facilitates our analysis. We show that intervention purchases and sales both exert a significant influence on the exchange rate spread, but in opposite directions. Intervention purchases of the small currency, on average, narrow the spread while intervention sales of the small currency, on average, widen the spread. This is a novel finding that differs from those of existing studies that find intervention always widens the exchange rate spread and increases market uncertainty.