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Israel’s foreign currency market in the third quarter of 2022

The Bank of Israel has released the data on Israel’s foreign currency market for Q3 2022.

1. The Exchange Rate

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Mixed trend of the shekel alongside continued strengthening of the dollar worldwide.

During the course of the third quarter, there was a mixed trend in the shekel—it weakened by approximately 1.2 percent against the US dollar, and strengthened by approximately 4.1 percent against the euro. In addition, the shekel strengthened by 3.2 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).

In parallel, the trend from the beginning of the year of the strengthening of the US dollar against the world’s major currencies continued. The dollar strengthened by 5.6 percent against the euro, by about 5.2 percent against the Japanese yen, and by about 8.2 percent against the pound sterling.

2. Exchange Rate Volatility

A decrease in actual volatility and an increase in implied volatility.

The standard deviation of changes in the shekel/dollar exchange rate, which represents its actual volatility, declined during the quarter, to a level of 10.6 percent.

The average implied volatility in over-the-counter shekel/dollar options, an indication of expected exchange rate volatility, increased to about 9.5 percent by the end of the quarter.

For comparison, the average level of implied volatility in foreign exchange options in the emerging markets was 14.3 percent at the end of the quarter, an increase of 0.9 percentage points from its level at the end of the previous quarter. The average level of implied volatility in the advanced-economy markets was 10.6 percent at the end of the quarter, an increase of about 1.1 percentage points from the previous quarter.

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 third quarter, institutional investors (pension funds, provident funds, and insurance companies) purchased foreign currency totaling about a net of $1.4 billion, and the business sector purchased foreign currency totaling about a net of $2.1 billion. Nonresidents sold a net of about $5.5 billion.

4. Trading Volume in the Foreign Currency Market

The average daily trading volume declined during the quarter by about 2.7 percent, to about $10 billion, with most of the decline due to a decrease in the daily trading volume of spot and forward transactions (Conversions).

Nonresidents’ share of total trading volume vis-à-vis the domestic banking system (spot and forward transactions, options, and swaps) increased by about 1.1 percentage points to about 47.9 percent at the end of the third 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 indicates that nonresidents’ relative share of trading volume in spot and forward transactions (excluding swaps and options) was 81.7 percent in the third quarter, and that trade between nonresidents constituted 70.4 percent of the volume, which had a daily average of $10 billion.



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