Abstract
We estimate a two-equation system on the euro-Czech koruna exchange rate and order flow at hourly frequency within the framework of Evans-Lyons (2001, JME). We use transactions data from the Reuters Spot Matching market in the second half of 2002, during which the Czech National Bank conducted discreet interventions to stem the appreciation of the domestic currency. We find a significant impact of order flow on the exchange rate, equal on average to 7.6 basis points per 10 million Euro, of which 80 percent persists through the day. The news of intervention increases the price impact of order flow by 3.9 basis points per 10 million Euro, consistently with the notion of intervention efficacy. The order flow equation yields inconclusive results. Our findings on the intraday behavior of the exchange rate provide useful insights on the conditions for effective central bank actions in the future, in view of participation in the ERM II.
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