Israel's foreign currency market in December 2010

                                                                                                                                                                 09.01.2011
 
Israel’s foreign currency market in December 2010
 
Developments in the exchange rate––the shekel appreciated against the dollar as the dollar weakened around
 the world
The shekel appreciated by about 3.6 percent against the dollar during December and by about 1.1 percent against the euro. Against the currencies of Israel's main trading partners, the nominal effective exchange rate of the shekel, i.e., the trade-
weighted average shekel exchange rate against those currencies, strengthened by about 2.0 percent.
In December, the dollar weakened against most major currencies––by about 2.6 percent against the euro, by about 3.0
 percent against the yen and by about 6.2 percent against the Swiss franc.
For 2010 as a whole, the shekel appreciated by about 6.0 percent against the dollar and by about 12.9 percent against the
 euro. In terms of the nominal effective exchange rate, the shekel appreciated by about 7.0 percent during this period.
The volatility of the exchange rate––a drop in the actual volatility of the exchange rate and in the implied
 standard deviation
The standard deviation of changes in the exchange rate, which represents actual volatility, fell to a level of 4.8 percent in December, compared to 7.7 percent in November.
Average volatility for 2010 as a whole was 6.6 percent, which was lower than the volatility of the shekel/dollar exchange rate
 in 2008 and 2009 (14.7 percent and 11.2 percent, respectively).
The average level of the implied volatility in OTC (over the counter) forex options––an indication of expected exchange rate volatility––was 8.5 percent in December, compared with an average of 7.9 percent for all of 2010. For the sake of
comparison, the implied volatility of foreign exchange options in emerging and developed economies averaged 12.7 percent
 and 12 percent, respectively, in December.
There was a particularly high volume of trade in swap transactions in December
The total volume of trade in foreign currency in December was about $146 billion, compared with about $131 billion in
November and an average monthly level of $109 billion for 2010 as a whole. The volume of trade in spots and forward transactions totaled about $40.0 billion, a daily average of about $1.7 billion, similar to the daily average in November. Nonresidents' transactions in spots and forwards totaled some $12 billion in December, accounting for 31 percent of the
trade in these instruments. The Bank of Israel purchased about $2.3 billion in December[1].
The year 2010 was characterized by high volumes of activity in the foreign currency market, particularly during the last
 quarter of the year. The average monthly volume of trade in 2010 stood at about $109 billion in comparison to about $87.3
 billion in 2009 and about $95.5 billion in 2008. Most of the increase in volume from 2009 to 2010 was a result o the growth
 in swap transactions, from a monthly average of about $39.6 billion in 2009 to about $63 billion in 2010). In contrast, the
 volume of trade in spot and forward transaction was in fact lower in 2010 than in previous years (a monthly average of
about $34 billion in 2010 as compared to about $36.8 billion in 2009 and about $41.5 billion in 2008).
The relative share of nonresidents in the total volume of trade (exchange, option and swap transactions) grew in 2010 to a
 level of about 62 percent, in comparison to about 54 percent in 2008 and 2009. This was primarily the result of the increase
 in the total activity in swap transaction. Nonresidents' relative share in exchange transactions (about 37 percent) was similar
 to that in previous years (about 34 percent in 2009 and 36 percent in 2008).
 




 
Forex transactions with domestic banks, by instruments and derivatives ($ million)
    Conversions (1) Swapsa (2) Optionsb (3) Total volume of trade (1)+(2)+(3)
Decembr-10 (Not final) Total 39,757 95,374 10,917 ​146,048
Daily average (23-days) 1,729 4,147 475 6,350
Nonresidents 12,286 76,331 5,339 93,956
of which Foreign financial institutions 11,842 76,296 5,317 93,455
Residents 27,471 19,043 5,578 52,092
of which Real sector 10,784 2,215 1,816 14,815
Financial sector 4,837 6,870 1,319 13,026
Institutions (incl. insurance companies) 2,215 2,516 20 4,751
Individuals and provident funds 793 147 313 1,253
The Bank of Israel 2,304     2,304
Otherc 1,349 63 137 1,549
Domestic banksd 5,189 7,232 1,973 14,394
           
November- 10 Total 37,663 77,358 16,111 131,132
Daily average (22-days) 1,712 3,516 732 5,961
Nonresidents 14,204 58,610 9,419 82,233
of which Foreign financial institutions 13,907 58,600 9,369 81,876
Residents 23,459 18,748 6,692 48,899
of which Real sector 9,653 1,985 2,636 14,274
Financial sector 5,118 6,426 1,116 12,660
Institutions (incl. insurance companies) 2,225 2,370 133 4,728
Individuals and provident funds 750 245 253 1,248
The Bank of Israel 0     0
Otherc 483 75 257 815
Domestic banksd 5,230 7,647 2,297 15,174
 
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 22
[1] This figure is different from what was reported in the latest press release on the foreign exchange reserves. The difference results from foreign exchange purchases totaling $500 million by the Bank of Israel in the last days of December, the value dates of which were in January
 
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