Summary of Israel's Foreign Exchange Activity in March 2006

Summary of Israel's Foreign Exchange Activity in March 2006
In March, the NIS appreciated against the dollar by 0.9 percent, and against the basket of currencies by 0.4 percent. In the first half of the month the NIS remained steady at NIS 4.70 to the dollar, and in the second half the exchange rate was more volatile, and fluctuated between NIS 4.66 and NIS 4.72. Data released today by the Foreign Exchange Activity Department of the Bank of Israel show that exchange-rate risk––as measured by the implied volatility of NIS/$ options––was stable, at the low level of 5.3 percent, but from 27 March, the day before the General Election, it rose somewhat to 5.7 percent, and remained steady at that level in early April.
The stability of the exchange rate in March with some fluctuations without a clear trend resulted from the activity of nonresidents and residents in opposite directions: nonresidents were net sellers of foreign currency, while residents were net buyers. The exchange rate in the second half of the month, when it was slightly more volatile, was affected by a significant volume of short-term activity by nonresidents in both directions, by means of derivatives. The global effect deriving from the changes in the exchange rate of the dollar against other currencies was also evident.
In March there was a marked rise in nonresidents' investment in local-currency government bonds, and the long-term trends observed recently persisted: long-term capital inflow by nonresidents via continued direct investments and portfolio investments on the Tel Aviv Stock Exchange (which continued after the General Election), and in the opposite direction continued outflow of capital by households by accumulation in mutual funds specializing in foreign shares.
In March there was a reduction in households' accumulation in mutual funds specializing in overseas investments from the levels in the January and February. In March it totaled $280 million, compared to about $400 million a month in January and February. Since the beginning of the year the accumulation came to $1.1 billion, compared to a total of $0.9 billion in the whole of 2005, with most of it in funds that invest in shares in markets around the world. This occurred against the background of high yields in many emerging markets, and as part of the process of adjusting portfolios in the light of the abolition of the tax discrimination which had previously favored investments in Israel.
Main Indicators of Activity in the NIS/FX Market
FX sales (+), FX purchases (–)
$ million
  2004 2005 Feb 2006 Mar 2006
1. Nonresidents
Total direct and portfolio (shares and bonds) investmenta 6,083 10,394 245 1,186
Portfolio investment in Israeli securities (bonds and shares) (+) 4,349 4,330 –76 663
Of which: In portfolio shares on the TASE (+) 502 2,136 184 136
In Israeli bonds on the TASE (+) 45 512 –223 288
Israeli issues abroad (bonds and shares) 2,842 1,290 19 143
Direct investment (+) 1,734 6,064 321 523
2. Business sector
Accumulation in foreign-currency deposits (-) –1,981 –3,256 –446 –562
Net foreign-currency bank credit taken from banks in Israel (+) –1,012 –3,633 25 –181
3. Institutional investors (excl. mutual funds): investments in assets abroad (-) –906 –3,012 –166 –225
4. Households
Accumulation (-) in mutual funds specializing in forex –228 –912 –422 –281
Accumulation (-) in forex deposits in banks in Israel –662 –1,429 –72 –164
a Excluding government bonds floated abroad.