Israel’s foreign currency market in the first quarter of 2022

1. The Exchange Rate

 

Weakening of the shekel against the dollar, in contrast with a mixed trend of the dollar worldwide.

 

During the course of the first quarter, the shekel weakened by approximately 2.1 percent against the dollar, and by approximately 0.1 percent against the euro, contrary to the long-term trend. In addition, the shekel weakened by 0.6 percent against the currencies of Israel's main trading partners, in terms of the nominal effective exchange rate (i.e., the trade-weighted average shekel exchange rate against those currencies). 

 

There was a mixed trend of the dollar against major currencies during the first quarter—the dollar strengthened by about 2 percent against the euro and by about 5.9 percent against the Japanese yen. In contrast, the dollar weakened by 2.9 percent against the Australian dollar and by about 1.6 percent against the Canadian dollar (Figure 2).

 

2. Exchange Rate Volatility

 

An increase in actual volatility and in implied volatility.

 

The standard deviation of changes in the shekel/dollar exchange rate, which represents its actual volatility, continued to increase during the quarter, to an average level of 8.5 percent.

 

The average implied volatility in over-the-counter shekel/dollar options, an indication of expected exchange rate volatility, increased by about 1.6 percentage points during the quarter, to about 8.1 percent.

 

The average implied volatility in foreign exchange options in the emerging markets was 12.6 percent at the end of the first quarter, an increase of 0.8 percentage points from its level at the end of the previous quarter. The average level of implied volatility in the advanced markets was 7.5 percent at the end of the quarter, an increase of 0.5 percentage points from the previous quarter (Figure 4).

 

3. The Activity of the Main Segments in the Foreign Exchange Market[1]

 

An estimate of the activity of the main segments in the foreign exchange market indicates that during the course of the first quarter, institutional investors (pension funds, provident funds, and insurance companies) acted contrary to their trend of the previous two years, and made net purchases of foreign currency totaling about $12.4 billion.  In contrast, the business sector made net sales of foreign currency totaling about $7 billion, and nonresidents continued to act in line with the long term trend, making net sales of about $5.1 billion. 

  


4. The Volume of Trade in the Foreign Currency Market—Tables and Figures

 

Trading volume vis-à-vis the domestic banking system[2]

 

The average daily trading volume increased by about 3.8 percent during the quarter, to about $10.7 billion, with most of the increase due to an increase in the daily trading volume of spot and forward transactions.

 

Nonresidents' share of total trading volume vis-à-vis the domestic banking system (spot and forward transactions, options, and swaps) decreased by about 0.5 percentage points to about 44.6 percent at the end of the fourth quarter.

 


Estimated total trading volume[3]—domestic banking system and foreign reporting entities

 

The estimated total activity in transactions against the shekel reflected in reports from the domestic banking system and foreign reporting entities shows that nonresidents’ relative share of trading volume in spot and forward transactions (excluding swaps and options) was 77 percent in the first quarter, and that trade between nonresidents constituted 63 percent of the volume, which had a daily average of $8.7 billion.

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Foreign Currency Market Graphs and Data Q1.xlsxForeign Currency Market Graphs and Data Q1.xlsx

[1] The main segments presented do not make up the entire market—for additional information, see the section on “The Database of Foreign Exchange Market Activity” in the Bank of Israel's "Statistical Bulletin" for 2018 (in Hebrew):

https://www.boi.org.il/he/NewsAndPublications/RegularPublications/Documents/MabatStat2018/shekel.pdf

[2] Volumes of trade only vis-à-vis the domestic banking system. From the beginning of 2020, the data do not include branches of foreign banks in Israel.

[3] Total trading volume is an estimate of total activity in transactions against the shekel, based on reports by the domestic banking system and by foreign reporting entities.​​