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, 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.