Israel’s foreign currency market in the second quarter 2018




1. The Exchange Rate

Weakening of the shekel against the dollar, together with a strengthening of the dollar worldwide.

During the second quarter, the shekel weakened by 3.9 percent against the dollar, and strengthened by 1.7 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 strengthened by about 0.5 percent in the second quarter.

Worldwide, the US dollar strengthened against most major currencies in second quarter. The dollar strengthened by 5.7 percent against the euro, by 3.9 percent against the Japanese yen, by 3.8 percent against the Swiss franc, and by 6.8 percent against the British pound.

 

 

2. Exchange Rate Volatility

A decline in actual volatility of the exchange rate, and a decline in implied volatility.

The standard deviation of changes in the shekel-dollar exchange rate, which represents its actual volatility, declined by about 0.8 percentage points in the second quarter, to 5.9 percent at the end of June.

The average level of implied volatility in over the counter shekel-dollar options declined by 0.1 percentage points in the second quarter, to 7.3 percent at the end of June.

The implied volatility in foreign exchange options in advanced markets was 7.4 percent in the second quarter, compared with about 7.8 percent in the previous quarter.  In contrast, the implied volatility in foreign exchange options in emerging economies increased, to about 9.6 percent in the second quarter, compared with 8.8 percent in the previous quarter (Figure 4).

The implied volatility in foreign exchange options trading is an indication of expected exchange rate volatility.

 

  

3. The Volume of Trade in the Foreign Currency Market

Total trading volume declined, together with an increase in nonresidents’ relative share of total trading volume.

 

Total trading volume in foreign currency in the second quarter was about $494 billion, compared with about $518 billion in the previous quarter. Average daily trading volume declined by about 5 percent, to about $8.1 billion.

 

The trading volume in spot and forward transactions (conversions) was about $123 billion in the second quarter. Average daily trading volume in those transactions declined in the second quarter by about 8 percent compared with the previous quarter, to about $2 billion.

 

The trading volume in over the counter foreign currency options (which are not traded on the stock exchange) totaled about $21.5 billion in the second quarter. The average daily trading volume in those options declined compared with the previous quarter, to about $353 million.

 

The trading volume in swap transactions totaled about $348 billion in the second quarter, compared with about $354 billion in the previous quarter. Average daily trading volume in swap transactions declined by about 2 percent compared with the previous quarter, to around $5.7 billion.

 

Nonresidents' share of total trade (spot and forward transactions, options and swaps) increased by about 0.3 percentage points to about 37.7 percent at the end of the second quarter.