This paper establishes formal models to study optimal foreign exchange intervention policy when a currency is anticipated to depreciate by speculators, and when a central bank aims both to discourage speculative capital flows and to reduce exchange rate misalignment. In particular, we study two cases where speculators have perfect and imperfect information about the central bank’s long-run equilibrium exchange rate target. The major results are as follows: (1) In the perfect information case, the central bank will be better off by precommitting to a specific exchange rate level, rather than deciding it discretionarily. (2) In the imperfect information case, the central bank cannot credibly reveal its exchange rate target to speculators through “cheap talk”. (3) In the imperfect information case, any action taken by the central bank will send a signal to speculators about the central bank’s preferences, causing a change in speculators’ beliefs and subsequently speculative capital flows.

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