Israel’s foreign currency market in January 2014

1. The Exchange Rate

The dollar strengthened against the shekel, in parallel with the dollar's strength against global currencies.

The shekel weakened by about 0.8 percent against the dollar, and strengthened by about 1 percent against the euro during January. 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 0.7 percent.

In January, the dollar strengthened against most global currencies—including by about 1.4 percent against the Swiss franc, by about 1.7 percent against the euro, and by about 0.5 percent against the British pound—but weakened by about 2.3 percent against the Japanese yen.

2. Exchange Rate Volatility

Actual volatility of the exchange rate declined, in parallel with a decline in its implied volatility.

The standard deviation of changes in the shekel-dollar exchange rate, which represents its actual volatility, declined in January by about 0.4 percentage points to 3.2 percent, compared with 3.6 percent in December.

The average level of implied volatility in over the counter shekel-dollar options––an indication of expected exchange rate volatility––declined to 7.3 percent at the end of January, compared with 7.6 percent in December.

In January, the implied volatility in foreign exchange options in emerging markets increased, reaching 9.7 percent on average, compared with 9.3 percent in December.  In contrast, the implied volatility in foreign exchange options in advanced economies remained unchanged in January, at 8.2 percent.

3. The Volume of Trade in the Foreign Currency Market

Average daily trading volume increased, in parallel with a decline in non-residents’ share of total trading volume

The total volume of trade in foreign currency in January was about $98 billion, compared with about $87 billion in December. Average daily trading volume increased by about 7 percent in January, and reached about $4.5 billion.

The volume of trade in spot and forward transactions (conversions) was about $37 billion in January, compared with $33 billion in December. The average daily trading volume in those transactions increased in January by about 6 percent compared with December. During January, the Bank of Israel bought $1.8 billion through conversion transactions[1], including $340 million as part of the purchase program intended to offset the effect of natural gas production on the exchange rate.

The volume of trade in over the counter foreign currency options (which are not traded on the stock exchange) totaled about $10 billion in January. The average daily trading volume in those options in January was about $465 million, a decline of about 3 percent from its level in December.

The trading volume of swap transactions was about $50 billion in January. Average daily turnover increased from the previous month, to around $2.3 billion.

Nonresidents' share of total trade (spot and forward transactions, options and swaps) continued to decline in January, to about 30 percent.

 


[1] This figure reflects transactions by trade date, not settlement date. Therefore, it is not necessarily identical to the data published in the foreign exchange reserves notice, which reflects transactions by settlement date.

 

 

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Forex transactions with domestic banks, by instruments and sectors           
($ million)

 

 
 
 Conversions (1)
 Swaps[1] (2)
 Cross Currency swap[2] (3)
 Options[3] (4)
Total volume of trade (1)+(2)+(3)+(4)
January
2014
 (Not final)
Total
36,908
49,685
1,321
10,224
98,138
 Daily average (21 days)
1,678
2,258
60
465
4,461
Nonresidents
11,984
12,742
108
4,018
28,852
 of which Foreign financial institutions
10,948
12,395
108
3,873
27,324
Residents
24,924
36,943
1,213
6,206
69,286
 of which Real sector
6,274
4,944
101
2,755
14,074
 Financial sector
4,267
14,160
391
1,442
20,260
 Institutions (incl. insurance companies)
5,085
6,566
104
81
11,836
 Individuals and provident funds
820
587
0
612
2,019
 The Bank of Israel
1,840
0
0
0
1,840
of which within the program to offset the gas effect
340
0
0
0
340
 Other[4]
3,247
32
0
130
3,409
 Domestic banks[5]
3,391
10,654
617
1,186
15,848
December 2013
Total
33,219
43,456
577
10,059
87,311
 Daily average (23 days)
1,582
2,069
27
479
4,158
Nonresidents
11,029
15,097
0
4,062
30,188
 of which Foreign financial institutions
10,315
15,025
0
4,011
29,351
Residents
22,190
28,359
577
5,997
57,123
 of which Real sector
6,616
4,642
0
2,235
13,493
 Financial sector
4,446
11,095
200
2,475
18,216
 Institutions (incl. insurance companies)
2,341
4,610
177
186
7,314
 Individuals and provident funds
901
359
0
334
1,594
 The Bank of Israel
560
0
0
0
560
of which within the program to offset the gas effect
260
0
0
0
260
 Other4
3,475
38
0
12
3,525
 Domestic banks5
3,851
7,615
200
755
12,421

 



[1]  Only one leg of the swap, i.e., the nominal value of the transaction (in accordance with the BIS definition)
[2]  The exchanged founds through Cross Currency Swap transactions considered for the volume, as one leg only in cases where the two legs offset each other.
[3] The national value, that includes purchases and sales of put and call options.
[4] Including other entities such as portfolio managers, nonprofit organizations, national institutions, and those not include elsewhere.
[5] Total interbank trade, divided in two.