Israel’s foreign currency market in the fourth quarter of 2021
1. The Exchange Rate
Strengthening of the shekel against the dollar, in contrast with the strengthening of the dollar worldwide.
During the course of the fourth quarter, the shekel strengthened by approximately 3.7 percent against the dollar, and by approximately 5.8 percent against the euro, in line with the long-term trend. In addition, the shekel strengthened by 5.6 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 was a mixed trend of the dollar against major currencies during the fourth quarter—the dollar strengthened by 2.2 percent against the euro and by 2.7 against the Japanese yen. In contrast, the dollar weakened by 0.6 percent against the pound sterling and by 2.5 against the Swiss franc. (Figure 2).
2. Exchange Rate Volatility
An increase in actual volatility and in implied volatility.
The standard deviation of changes in the shekel/dollar exchange rate, which represents its actual volatility, increased to 7.9 percent during the fourth quarter, a change in trend after half a year of declines.
The average implied volatility in over-the-counter shekel/dollar options, an indication of expected exchange rate volatility, increased by about 1 percentage point during the quarter, to about 6.5 percent.
The average implied volatility in foreign exchange options in the emerging markets was 11.8 percent at the end of the fourth quarter, an increase of 2.3 percentage points from its level at the end of the previous quarter. The average level of implied volatility in the advanced markets was 7 percent at the end of the quarter, an increase of 0.5 percentage points from the previous quarter (Figure 4).
3. The Activity of the Main Segments in the Foreign Exchange Market
An estimate of the activity of the main segments in the foreign exchange market indicates that during the course of the fourth quarter, institutional investors (pension funds, provident funds, and insurance companies) and nonresidents continued to act in line with the long term trend; institutional investors made net sales of foreign currency totaling about $7.1 billion; nonresidents made net foreign exchange sales of about $2.8 billion. The business sector made net sales of foreign currency of around $0.2 billion.
4. The Volume of Trade in the Foreign Currency Market—Tables and Figures
Trading volume vis-à-vis the domestic banking system
The average daily trading volume increased by about 3.3 percent during the quarter, to about $9.6 billion, with most of the increase due to an increase in the daily trading volume of spot and forward transactions.
Nonresidents' share of total trading volume vis-à-vis the domestic banking system (spot and forward transactions, options and swaps) decreased by about 5.4 percentage points to about 45.1 percent at the end of the fourth quarter.
Estimated total trading volume—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 78 percent in the fourth quarter, and that trade between nonresidents constituted 63 percent of the volume, which had a daily average of $7.8 billion.
 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):
 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.
 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.