Israel’s foreign currency market in 2014

Graphs & Data

1. The Exchange Rate

Weakening of the shekel against the dollar, in parallel with strengthening of the dollar worldwide.
 
In 2014, the shekel weakened by about 12 percent against the dollar. The trend in the exchange rate was not homogenous: Until August, the shekel strengthened by about 1 percent against the dollar, and from August until December it depreciated by 13 percent.  Against the euro, the shekel strengthened by about 1.2 percent in 2014.
Against the currencies of Israel's main trading partners, in terms of the nominal effective exchange rate of the shekel (i.e., the trade-weighted average shekel exchange rate against those currencies), the shekel weakened by about 3.1 percent in 2014, with the main depreciation being since August—about 5.7 percent.
The trend of a stronger dollar was global: In 2014, the dollar strengthened significantly against the currencies of most advanced economies—including by about 13.4 percent against the euro, by about 11.1 percent against the Swiss franc, and by about 6.4 percent against the British pound.  The dollar strengthened by an average of about 12 percent against the currencies of developing economies.
 
In December, the shekel remained stable against the dollar, and strengthened by 2.3 percent against the euro.  Globally, the dollar strengthened in December against most currencies, including by 2.3 percent against the euro, by 0.6 percent against the British pound, and by 2.5 percent against the Swiss franc.
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2. Exchange Rate Volatility
An increase in actual volatility of the exchange rate, in parallel with an increase in the implied volatility of the exchange rate.
 
The monthly standard deviation of changes in the shekel-dollar exchange rate, which represents its actual volatility, increased during 2014 by about 6 percentage points to 9.4 percent in December.  Most of the increase took place in the second half of the year.
The average monthly level of implied volatility in over the counter shekel-dollar options—an indication of expected exchange rate volatility—increased more moderately during 2014, by about 1.7 percentage points to 9.3 percent.
The implied volatility in foreign exchange options in advanced markets increased by about one percentage point during the year, to 9.2 percent in December, while the implied volatility in foreign exchange options in emerging markets remained stable, at 9.4 percent.
 
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3. The Volume of Trade in the Foreign Currency Market
A sharp increase in average daily trading volume during 2014, in parallel with a decline in nonresidents’ share of trading volume.
 
The average daily volume of trade in foreign currency in 2014 was about $6.4 billion, an increase of about 45 percent compared with about 2013, and in contrast with the decline in trading volume in the foreign currency market in 2013.
Most of the increase in volume was concentrated in swap transactions, where there was an average increase of about 87 percent to an average monthly level of about $79 billion in 2014.
 
The average volume of trade in spot and forward transactions (conversions) increased by about 14 percent, to about $38 billion per month in 2014.  During 2014, the Bank of Israel purchased about $7 billion in spot and forward transactions, of which about $3.5 billion were as part of the purchasing program intended to offset the effects of natural gas production on the exchange rate.  Since August 2014, the Bank of Israel’s purchases were only in order to offset the effects of natural gas production, and totaled about $1.5 billion.
 
Nonresidents' average share of the average monthly trading volume declined by 9 percentage points in 2014, to about 31 percent, further to the decline of about 4 percentage points during 2013.  Israelis’ average share of the average monthly trading volume increased to 69 percent.
 
In December, total trading volume in foreign exchange was about $176 billion, compared to about $138 billion in November.  The Bank of Israel purchased $445 million dollars in spot and forward (conversion) transactions[1] as part of the purchasing program intended to offset the effects of natural gas production on the exchange rate.
 
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Forex transactions with domestic banks, by instruments and sectors           
($ million)
 
 
 Conversions (1)
 Swaps[2] (2)
 Cross Currency swap[3] (3)
 Options[4] (4)
Total volume of trade (1)+(2)+(3)+(4)
December
2014
 (Not final)
Total
51,803
106,612
2,990
14,358
175,763
 Daily average (21 days)
2,467
5,077
142
684
8,370
Nonresidents
17,845
33,966
1,854
3,788
57,453
 of which Foreign financial institutions
16,988
31,919
1,854
3,647
54,408
Residents
33,958
72,646
1,136
10,570
118,310
 of which Real sector
8,391
10,852
1,086
4,821
25,150
 Financial sector
8,789
41,841
0
2,902
53,532
 Institutions (incl. insurance companies)
3,761
9,476
0
375
13,612
 Individuals and provident funds
1,447
1,265
0
557
3,269
 The Bank of Israel
445
0
0
0
445
of which within the program to offset the gas effect
445
0
0
0
445
 Other[5]
3,905
18
0
199
4,122
 Domestic banks[6]
7,220
9,194
50
1,716
18,180
November
 2014
Total
37,684
87,778
728
11,631
137,821
 Daily average (20 days)
1,884
4,389
36
582
6,891
Nonresidents
15,192
24,569
190
3,655
43,606
 of which Foreign financial institutions
14,537
24,063
190
3,648
42,438
Residents
22,492
63,209
538
7,976
93,856
 of which Real sector
6,315
8,274
224
3,784
18,597
 Financial sector
5,675
36,495
89
2,812
45,071
 Institutions (incl. insurance companies)
1,910
7,503
0
40
9,453
 Individuals and provident funds
861
2,850
0
341
4,052
 The Bank of Israel
150
0
0
0
150
of which within the program to offset the gas effect
150
0
0
0
150
 Other4
3,133
16
0
152
3,301
 Domestic banks5
4,448
8,071
225
847
13,591
 


[1] This figure reflects transactions by trade date, not settlement date. Therefore, it is not necessarily identical to the data published in the foreign exchange reserves notice, which reflects transactions by settlement date.
[2]  Only one leg of the swap, i.e., the nominal value of the transaction (in accordance with the BIS definition)
[3]  The exchanged founds through Cross Currency Swap transactions considered for the volume, as one leg only in cases where the two legs offset each other.
[4] The national value, that includes purchases and sales of put and call options.
[5] Including other entities such as portfolio managers, nonprofit organizations, national institutions, and those not include elsewhere.
[6] Total interbank trade, divided in two.