Israel’s foreign currency market in August 2012

1. The Exchange Rate

The shekel weakened against the dollar, while the dollar was mixed against global currencies

 

The shekel depreciated by about 0.8 percent against the dollar during August, and weakened by about 2.7 percent against the euro. 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 1.5 percent.

In August, the dollar traded mixed against most currencies in the world, weakening by 2 percent against the euro and the Swiss franc, but strengthening by 0.4 percent against the Japanese yen and by about 2% against the Australian dollar.

 

 

2. Exchange Rate Volatility

Actual volatility of the exchange rate decreased, while implied volatility increased

 

The standard deviation of changes in the shekel-dollar exchange rate, which represents its actual volatility, decreased in August to 7.1 percent, compared with 9.2 percent in July.

The average level of the implied volatility in over the counter shekel-dollar options––an indication of expected exchange rate volatility––increased in August to about 9.9 percent, compared with about 9.2 percent in July.

For comparison, the implied volatility of foreign exchange options in emerging markets in August was 11 percent on average, compared with 11.4 percent in July, and that in advanced economies was 8.7 percent, down from 9.3 percent in July.

 

 

3. The Volume of Trade in the Foreign Currency Market

There was a decline in average daily trading volume, while there was an increase in nonresidents' share of trading volume

 

The total volume of trade in foreign currency in August was about $111 billion, compared with $123 billion in July. Average daily trading volume decreased by about 14 percent in August, and reached about $4.8 billion.

 

The volume of trade in spot and forward transactions (conversions) was about $39 billion in August, compared with $44 billion in July. The average daily trading volume in those transactions declined by about 15 percent in August compared with July, to $1.7 billion.

 

The volume of trade in over the counter foreign currency options (which are not traded on the stock exchange) totaled about $12 billion in August, compared with $16 billion in July. The average daily trading volume in those options in August was $523 million, a decline of 31 percent from July.

 

The trading volume of swap transactions was about $59 billion in August, compared with $62 billion in July. Continuing the trend of the past few months, average daily turnover of swap transactions continued to decline, to about $2.6 billion, compared with $2.8 billion in July, $3.3 billion in June, $3.5 billion in May and $3.9 billion in April.

 

Nonresidents' share of total trade (spot and forward transactions, options and swaps) increased in August to about 50 percent, compared with 46.2 percent in July and 44.3 percent in June. The increase derived primarily from a decline in the activity of Israeli residents in all instruments.

 

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Forex transactions with domestic banks, by instruments and derivatives ($ million)
 
 
 Conversions (1)
 Swapsa (2)
 Optionsb (3)
Total volume of trade (1)+(2)+(3)
August-12
 (Not final)
Total
39,411
59,333
12,032
110,776
 Daily average (23 days)
1,714
2,580
523
4,816
Nonresidents
16,679
30,646
7,845
55,170
 of which Foreign financial institutions
15,974
30,508
7,694
54,176
Residents
22,732
28,687
4,187
55,606
 of which Real sector
5,694
1,933
1,264
8,891
 Financial sector
4,784
15,768
339
20,891
 Institutions (incl. insurance companies)
2,942
4,546
126
7,614
 Individuals and provident funds
678
446
323
1,447
 The Bank of Israel
0
 
 
0
 Otherc
3,014
68
46
3,128
 Domestic banksd
5,620
5,926
2,089
13,635
 
 
 
 
 
 
July-12
Total
44,269
61,946
16,707
122,922
 Daily average (22-days)
2,012
2,816
759
5,587
Nonresidents
18,644
28,590
9,579
56,813
 of which Foreign financial institutions
17,672
27,651
9,139
54,462
Residents
25,625
33,356
7,128
66,109
 of which Real sector
7,339
2,354
2,361
12,054
 Financial sector
5,295
15,345
1,243
21,883
 Institutions (incl. insurance companies)
2,542
4,027
725
7,294
 Individuals and provident funds
793
332
441
1,566
 The Bank of Israel
0
 
 
0
 Otherc
3,088
66
120
3,274
 Domestic banksd
6,568
11,232
2,238
20,038
 
 
 
 
 
 
 
 
 
 
 
 
 
a Only one leg of the swap, i.e., the nominal value of the transaction (in accordance with the BIS definition).
 
b The notional value, that includes purchases and sales of put and call options.
 
c Including other entities such as portfolio managers, nonprofit organizations, national institutions, and those not included elsewhere.
 
d Total interbank trade, divided by 2