Summary of Israel's Foreign Exchange Activity in March 2007

Summary of Israel's Foreign Exchange Activity in March 2007
The NIS/dollar exchange rate did not follow a uniform path in March: until the publication of the Bank of Israel interest rate decision (on 26 March), the shekel appreciated slightly against the dollar, by 0.2 percent, and against the euro by 0.3 percent. Thereafter the shekel started appreciating steadily, and against the dollar it appreciated (up to 10 April 2007) by a cumulative 1.9 percent, and against the euro by 0.8 percent.
Exchange-rate risk––as measured by the implied volatility of NIS/$ options––fell slightly in March, by 0.2 percentage points, to 5.3 percent.
The Department of Foreign Exchange Activity of the Bank of Israel reports that in March nonresidents’ activity was fairly restrained, while residents were more active, and were net purchasers of foreign exchange.
Nonresidents’ activity declined steeply in areas less sensitive to interest rate differentials, i.e., investment in Israeli shares, both direct and portfolio, and there was even a modest amount of selling of shares traded on the Tel Aviv Stock Exchange (TASE). In the areas more sensitive to the interest rate differentials, nonresidents switched to investments in government bonds traded on the TASE (including purchases of bonds issued at the end of March), in the framework of the reform that introduced market making––following two months of selling bonds.
The business sector bought foreign currency via various instruments, those that are sensitive to interest rate differentials as well as those that are less so. The purchases via the sensitive instruments focused on deposits in banks in Israel and abroad (mainly the latter) and repayment of credit (the direction of which activity is unique to this segment at times of appreciation, against the background of the negative interest rate differential); these two combined totaled $ 1.35 billion this month. Purchases via the instruments less sensitive to the interest rate differential were mainly in the form of investments in foreign securities, both direct and portfolio.
The institutional investors' reduced the rate of their investment in foreign assets from the previous months’ level, in the light of developments in the international markets in March..
Households continued to XXXwithdraw (make redemptions of) greater quantities than in the previous months of their holdings in mutual funds indexed to the exchange rate, and in funds that invest in emerging markets, mainly in the first part of the month, due to the heavy selling in those markets at that time. On the other hand, they continued investing in local currency mutual funds in Israel (those specializing in corporate bonds), but at a lower rate than in previous months. ..
Main Indicators of Activity in the NIS/Forex Market forex sales (+), forex purchases (-) $ million
  2004 2005 2006b Jan–Mar 2007 March 2007a
1. Nonresidents
Total direct and portfolio (shares and bonds) investmentc 7,527 8,962 22,417 2,693 358
Portfolio investment in Israeli securities (bonds and shares) (+) 5,443 4,205 8,263 1,538 178
Of which:In portfolio shares on the TASE (+) 502 2,139 -141 691 -43
In Israeli bonds on the TASE (+) 45 512 2,235 84 62
Israeli issues abroad (bonds and shares) 3,937 1,096 8,309 566 60
Direct investment (+) 2,084 4,757 14,154 1,155 180
Purchases of local-currency assets via derivatives (+) 311 2,303- 1,158 823- 7-
2. Business sector
Direct investments abroad (-) -4,450 -3,261 -12,553 -658 -316
Investments in portfolio bonds and shares (-) -2,560 -6,500 -7,458 -1,459 -285
Accumulation in foreign-currency deposits (-) -2,004 -3,540 -3,999 -2,411 -1,069
Net foreign-currency bank credit taken from banks in Israel (+) -1,012 -3,613 -1,810 -265 -281
Forward forex purchases (-) -1,086 2,059 -2,572 551- 823
3. Institutional investors (excl. mutual funds): investments in assets abroad (-) -622 -3,159 -3,339 -887 -52
4. Households
Accumulation (-) in mutual funds specializing in forex -228 -912 788 362 168
Accumulation (-) in forex deposits in banks in Israel -662 -1,427 -1,665 -356 -27
a The data for February are on a liquidity month basis, i.e., beginning on the last Thursday of the previous month and ending on the last Wednesday of the current month. Hence, different periods cannot be combined from these data.
b Excluding government bond issues abroad.
c Mainly the Teva deal.