Israel’s foreign currency market in the fourth quarter 2017
Strengthening of the shekel against the dollar, together with a mixed trend of the dollar worldwide.
During the fourth quarter, the shekel strengthened by 1.8 percent against the dollar, and by 0.1 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 1.1 percent in the fourth quarter.
Worldwide, the US dollar exhibited a mixed trend against most major currencies in fourth quarter. The dollar weakened by 1.7 percent against the euro, by 0.6 percent against the British pound, and by 0.1 percent against the Japanese yen. In contrast, it strengthened by 0.2 percent against the Swiss franc.
2. Exchange Rate Volatility
A decline in actual volatility of the exchange rate, while implied volatility remained unchanged.
The standard deviation of changes in the shekel-dollar exchange rate, which represents its actual volatility, declined by about 2.4 percentage points in the fourth quarter, to 4.3 percent at the end of the December.
The average level of implied volatility in over the counter shekel-dollar options was unchanged, at 7.5 percent at the end of December.
The implied volatility in foreign exchange options in advanced markets was 7.5 percent in the fourth quarter, compared with about 8.5 percent in the third quarter. In contrast, the implied volatility in foreign exchange options in emerging economies increased, to about 9.2 percent in the fourth quarter, compared with 8.9 percent in the third quarter (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 declined, in parallel with a decline in nonresidents’ relative share of total trading volume.
Total trading volume in foreign currency in the fourth quarter was about $393 billion, compared with about $412 billion in the third quarter. Average daily trading volume declined by about 8 percent, to about $6.3 billion.
The trading volume in spot and forward transactions (conversions) was about $90 billion in the fourth quarter. Average daily trading volume in those transactions declined in the fourth quarter by about 12 percent compared with the third quarter, to about $1.4 billion.
The trading volume in over the counter foreign currency options (which are not traded on the stock exchange) totaled about $16 billion in the fourth quarter. The average daily trading volume in those options decline compared with the third quarter, to about $270 million.
The trading volume in swap transactions totaled about $286 billion in the fourth quarter, compared with about $290 billion in the third quarter. Average daily trading volume in swap transactions declined by about 4 percent compared with the third quarter, to around $4.6 billion.
Nonresidents' share of total trade (spot and forward transactions, options and swaps) declined by about 3 percentage points to about 35 percent at the end of the fourth quarter. The decline was a result of lower volume of activity by nonresidents in all types of transactions (conversions, swaps and options).