Israel’s foreign currency market in the second quarter of 2022

1. The Exchange Rate

Weakening of the shekel against the dollar, in line with the broad strengthening of the dollar around the world.During the course of the second quarter, the shekel weakened by approximately 10.2 percent against the US dollar, and by approximately 3.2 percent against the euro, continuing the recent trend. In addition, the shekel weakened by 6.6 percent against the currencies of Israel's main trading partners, in terms of the nominal effective exchange rate (i.e., the trade-weighted average shekel exchange rate against those currencies). 

There strengthening of the US dollar against the world’s major currencies (Figure 2) during the quarter was broad and exceptional relative to the past decade.  It strengthened by about 6.8 percent against the euro, by about 12 percent against the Japanese yen, and by about 8.5 percent against the pound sterling


​2. Exchange Rate Volatility

​An increase in actual volatility and no change in implied volatility.The standard deviation of changes in the shekel/dollar exchange rate, which represents its actual volatility, continued to increase during the quarter, to an average level of 12.5 percent.

The average implied volatility in over-the-counter shekel/dollar options, an indication of expected exchange rate volatility, remained unchanged during the quarter, at about 8.1 percent.

The average implied volatility in foreign exchange options in the emerging markets was 13.4 percent at the end of the second quarter, an increase of 0.8 percentage points from its level at the end of the previous quarter. The average level of implied volatility in the advanced markets was 9.5 percent at the end of the quarter, an increase of about 2 percentage points from 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, institutional investors (pension funds, provident funds, and insurance companies) made net purchases of foreign currency totaling about $4.2 billion.  In contrast, the business sector made net sales of foreign currency totaling about $4.7 billion, and nonresidents made net sales of about $0.9 billion. 

 

4. The Volume of Trade in the Foreign Currency Market—Tables and Figures

Trading volume vis-à-vis the domestic banking system[2]

The average daily trading volume decline by about 4.2 percent during the quarter, to about $10.5 billion, with most of the decline due to a decline in the daily trading volume of swap transactions.

Nonresidents' share of total trading volume vis-à-vis the domestic banking system (spot and forward transactions, options, and swaps) increased by about 2.2 percentage points to about 46.1 percent at the end of the second quarter.

Estimated total trading volume[3]—domestic banking system and foreign reporting entities

The estimated total activity in transactions against the shekel reflected in reports from the domestic banking system and foreign reporting entities shows that nonresidents’ relative share of trading volume in spot and forward transactions (excluding swaps and options) was 79.2 percent in the second quarter, and that trade between nonresidents constituted 66 percent of the volume, which had a daily average of $9.4 billion.

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[1] The main segments presented do not make up the entire market—for additional information, see the section on “The Database of Foreign Exchange Market Activity” in the Bank of Israel's "Statistical Bulletin" for 2018 (in Hebrew):

https://www.boi.org.il/he/NewsAndPublications/RegularPublications/Documents/MabatStat2018/shekel.pdf

[2] 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.

[3] Total trading volume is an estimate of total activity in transactions against the shekel, based on reports by the domestic banking system and by foreign reporting entities.

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