Israel’s foreign exchange market in the first quarter of 2021

1. The Exchange Rate

 

Weakening of the shekel in parallel with strengthening of the dollar worldwide.

 

During the course of the first quarter, the shekel weakened by approximately 3.7 percent against the dollar, in contrast to the long-term trend of the shekel strengthening. In contrast, the shekel strengthened by about 0.8 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 approximately 1.3 percent.

 

The dollar strengthened in the first quarter against most major currencies—including the euro (4.5 percent), the Japanese yen (7.4 percent), and the Swiss franc (7 percent). In contrast, the dollar weakened against the British pound (0.7 percent) and the Canadian dollar (1.2 percent) (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, increased markedly during the quarter to an average level of 9.75 percent, more than double its average level in the previous quarter (Figure 3).

 

The average implied volatility in over the counter shekel/dollar options, an indication of expected exchange rate volatility, increased by 0.6 percentage points during the quarter, to an average level of 6.9 percent.

 

The implied volatility in foreign exchange options in emerging markets during the quarter was 10.4 percent. The average level of implied volatility in developed markets during the quarter was 7.2 percent, a decline of 0.5 percentage points compared with 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 of 2021, most segments continued with the long term trend. Institutional investors (pension funds, provident funds, and insurance companies) had net sales of foreign exchange totaling about $6.5 billion and nonresidents sold about $3.1 billion, net, of foreign exchange. In contrast, the business sector shifted from net purchases of foreign currency to net sales of about $4.1 billion.


4. Trading Volume[1] in the Foreign Exchange Market—tables and figures

 

The average daily trading volume increased by about 40 percent during the quarter, to about $10.2 billion, with most of the increase deriving from the daily trading volume in swaps.

 

Nonresidents' share of total trading volume (spot and forward transactions, options and swaps) increased by about 1.9 percentage points to about 43.3 percent at the end of the first quarter.



[1] 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.​



[1] The main segments presented do not make up the entire market—for additional information, see the section on “Dataset of foreign exchange market activity” in the Bank of Israel's "Statistical Bulletin" for 2018 :

https://www.boi.org.il/en/NewsAndPublications/RegularPublications/Documents/StatBulletin2018/part-two-1.pdf?fireglass_rsn=true​