Israel’s foreign currency market in the fourth quarter 2018
Weakening of the shekel against the dollar, together with a mixed trend of the dollar worldwide.
During the fourth quarter, the shekel weakened by 3.3 percent against the dollar, and by 1.8 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 weakened by about 3.3 percent in the fourth quarter.
Worldwide, the US dollar strengthened against most major currencies in fourth quarter. The dollar strengthened by 1.5 percent against the euro, by 2.5 percent against the British pound, and by 0.9 percent against the Swiss franc. In contrast, the dollar weakened by 3.2 percent against the Japanese yen.
2. Exchange Rate Volatility
A decline in actual volatility of the exchange rate, and stability in implied volatility.
The standard deviation of changes in the shekel/dollar exchange rate, which represents its actual volatility, declined by about 0.6 percentage points in the fourth quarter, to 5.4 percent at the end of December.
The average level of implied volatility in over the counter shekel/dollar options remained stable in the fourth quarter, at 7.4 percent at the end of December.
The implied volatility in foreign exchange options in the emerging markets declined in the fourth quarter, to 10.8 percent compared with 11.4 percent at the end of the previous quarter. In contrast, the implied volatility in foreign exchange options in the advanced markets increased to 8.1 percent at the end of the fourth quarter, compared with 7.5 percent at the end of the previous 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 increase, together with a decline in nonresidents’ relative share of total trading volume.
Total trading volume in foreign currency in the fourth quarter was about $478 billion, compared with about $464 billion in the previous quarter. Average daily trading volume declined by about 2 percent, to about $7.6 billion.
The trading volume in spot and forward transactions (conversions) was about $121 billion in the fourth quarter. Average daily trading volume in those transactions increased in the fourth quarter by about 8 percent compared with the previous quarter, to about $1.9 billion.
The trading volume in over the counter foreign currency options (which are not traded on the stock exchange) totaled about $23.5 billion in the fourth quarter. The average daily trading volume in those options increased compared with the previous quarter, to about $374 million.
The trading volume in swap transactions totaled about $333 billion in the fourth quarter, compared with about $339 billion in the previous quarter. Average daily trading volume in swap transactions declined by about 6.7 percent compared with the previous quarter, to around $5.2 billion.
Nonresidents' share of total trade (spot and forward transactions, options and swaps) declined by about 4.5 percentage points to about 36.7 percent at the end of the fourth quarter. The increase was a result of reduced volume of activity by nonresidents in swap, conversion, and options transactions.