Israel’s foreign currency market in December 2016


1. The Exchange Rate

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

In December, the shekel weakened by about 0.2 percent against the dollar, while strengthening by about 0.9 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 December.

Worldwide, the US dollar strengthened markedly against most major currencies in December. The dollar strengthened by 1 percent against the euro, by 3.1 percent against the Japanese yen, by 0.5 percent against the Swiss franc, and by about 1.4 percent against the British pound.

 

2. Exchange Rate Volatility

An increase in actual volatility of the exchange rate in parallel with an increase in implied volatility.

The standard deviation of changes in the shekel-dollar exchange rate, which represents its actual volatility, increased by about 1.2 percentage points in December, to 7 percent at the end of the month.

The average level of implied volatility in over the counter shekel-dollar options increased by about 0.1 percentage points, to 7.4 percent at the end of December.

In parallel, the implied volatility in foreign exchange options in emerging markets also increased, to an average of about 11.8 percent, and the implied volatility in foreign exchange options in advanced economies also increased, to about 10.3 percent at the end of December (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 December was about $167 billion, compared with about $160 billion in November. Average daily trading volume increased by about 9 percent, to about $7.9 billion.

 

The trading volume in spot and forward transactions (conversions) was about $33 billion in December. Average daily trading volume in those transactions decreased in December by about 2 percent compared with November.

 

The trading volume in over the counter foreign currency options (which are not traded on the stock exchange) totaled about $4.7 billion in December. The average daily trading volume in those options was essentially unchanged compared with November, at about $223 million.

 

The trading volume of swap transactions was about $129 billion in December, compared with about $118 billion in November. Average daily trading volume in swap transactions increased by about 14 percent compared with the previous month, to around $6.1 billion.

 

Nonresidents' share of total trade (spot and forward transactions, options and swaps) increased to about 34.4 percent at the end of December. The increase derived from an increase in the volume of activity by nonresidents in swap transactions.