News Column

Israel's Foreign Currency Market in April 2014

May 8, 2014

JERUSALEM, May 8 -- The Bank of Israel issued the following news release:

1. The Exchange Rate

The shekel strengthened against the dollar, as the dollar weakened against global currencies.

In April, the shekel strengthened by 0.6 percent against the dollar, and strengthened by about 0.2 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 strengthened by about 0.2 percent.

In April, the dollar weakened against most currencies--including by about 0.2 percent against the Swiss franc by about 0.4 percent against the euro, by about 1.2 percent against the British pound, and by about 0.7 percent against the Japanese yen.

2. Exchange Rate Volatility

Actual volatility of the exchange rate increased while implied volatility of the exchange rate declined

The standard deviation of changes in the shekel-dollar exchange rate, which represents its actual volatility, increased in April by about 0.2 percentage points to 4.6 percent.

The average level of implied volatility in over the counter shekel-dollar options--an indication of expected exchange rate volatility--declined to 6.7 percent at the end of April, compared with 7.1 percent in March.

At the same time, in April, the implied volatility in foreign exchange options in emerging markets also declined, reaching 8.6 percent on average. The implied volatility in foreign exchange options in advanced economies declined as well in April, to 6.7 percent at the end of the month.

3. The Volume of Trade in the Foreign Currency Market

A decline in trading volume of conversion transactions and in nonresidents' share of total trading volume

The total volume of trade in foreign currency in April was about $96 billion, compared with about $105 billion in March. Average daily trading volume increased by about 2 percent in April, and reached about $5.3 billion.

The volume of trade in spot and forward transactions (conversions) was about $27 billion in April, compared with about $32 billion in March. The average daily trading volume in those transactions declined in April by about 6.9 percent compared with March. During April, the Bank of Israel bought $590 million through conversion transactions[1], including $290 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 $6.1 billion in April. The average daily trading volume in those options in April was about $340 million, a decline of about 23 percent from its level in March.

The trading volume of swap transactions was about $63 billion in April. Average daily turnover increased from the previous month, to around $3.5 billion.

Nonresidents' share of total trade (spot and forward transactions, options and swaps) declined sharply in April, to about 27 percent, compared with about 39 percent in March.

See chart here:

[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.

[2 (] Only one leg of the swap, i.e., the nominal value of the transaction (in accordance with the BIS definition)

[3 (] 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.

[4 (] The national value, that includes purchases and sales of put and call options.

[5 (] Including other entities such as portfolio managers, nonprofit organizations, national institutions, and those not include elsewhere.

[6 (] Total interbank trade, divided in two.

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Source: Targeted News Service

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