Israel’s foreign currency market in the first quarter 2018





1. The Exchange Rate

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

During the first quarter, the shekel weakened by 1.4 percent against the dollar, and by 4.2 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 2.8 percent in the first quarter.

Worldwide, the US dollar weakened against most major currencies in first quarter. The dollar weakened by 2.8 percent against the euro, by 5.4 percent against the Japanese yen, by 2 percent against the Swiss franc, and by 4.2 percent against the British pound.

 

 

2. Exchange Rate Volatility

An increase 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, increased by about 2.4 percentage points in the first quarter, to 6.7 percent at the end of March.

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

The implied volatility in foreign exchange options in advanced markets was 7.8 percent in the first quarter, compared with about 7.5 percent in the fourth quarter.  In contrast, the implied volatility in foreign exchange options in emerging economies declined, to about 8.8 percent in the first quarter, compared with 9.2 percent in the fourth 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 increased, in parallel with an increase in nonresidents’ relative share of total trading volume.

 

Total trading volume in foreign currency in the first quarter was about $517 billion, compared with about $417 billion in the fourth quarter. Average daily trading volume increased by about 26 percent, to about $8.5 billion.

 

The trading volume in spot and forward transactions (conversions) was about $134 billion in the first quarter. Average daily trading volume in those transactions increased in the first quarter by about 41 percent compared with the fourth quarter, to about $2.2 billion.

 

The trading volume in over the counter foreign currency options (which are not traded on the stock exchange) totaled about $28 billion in the first quarter. The average daily trading volume in those options increased compared with the fourth quarter, to about $457 million.

 

The trading volume in swap transactions totaled about $354 billion in the first quarter, compared with about $304 billion in the fourth quarter. Average daily trading volume in swap transactions increased by about 18 percent compared with the fourth quarter, to around $5.8 billion.

 

Nonresidents' share of total trade (spot and forward transactions, options and swaps) increased by about 1.5 percentage points to about 37.6 percent at the end of the first quarter. The increase was a result of higher volume of nonresidents in all types of transactions (conversions, swaps and options).