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February 10, 2013

Israel’s foreign currency market in January 2013

1. The Exchange Rate

The shekel appreciated moderately against the dollar, as dollar trading was mixed against global currencies

The shekel appreciated by about 0.1 percent against the dollar during January, and weakened by about 2.6 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 about0.6 percent.

InJanuary, the dollar was mixed against global currencies—the dollar weakened by about 0.5 percent against the Swiss franc and by 2.8 percent against the euro, but strengthened by about 5.7 percent against the Japanese yen and by about 2.4 percent against the pound sterling.

2. Exchange Rate Volatility

Actual volatility of the exchange rate increased while implied volatility declined

The standard deviation of changes in the shekel-dollar exchange rate, which represents its actual volatility, increased in January to 7.5 percent, compared with 5.5 percent in December.

The average level of the implied volatility in over the counter shekel-dollar options––an indication of expected exchange rate volatility––declined inJanuary to about 9percent, compared with 9.3 percent inDecember. This was in contrast to the increase in implied volatility of foreign exchange options in emerging market and advanced economies,to an average level of 8.2 percent in January.

3. The Volume of Trade in the Foreign Currency Market

There was a decline in average daily trading volume, in contrast to an increase in nonresidents' share of trading volume

The total volume of trade in foreign currency in Januarywasabout $102billion, compared with$100billion in December. Average daily trading volume declined byabout 3percent inJanuary, and reached about $4.8 billion.

The volume of trade in spot and forward transactions (conversions)was about $40billion inJanuary, compared with $44billion in December.The average daily trading volume in those transactions declined in Januaryby about 12percent,compared withDecember, to about $1.9 billion.

The volume of trade in over the counter foreign currency options (which are not traded on the stock exchange) totaled about $13.3 billion inJanuary, compared with $8.8 billion in December. The average daily trading volume in those options in Januarywas $635 million, an increase of 44percent from December.

The trading volume of swap transactionswasabout $48billion inJanuary, compared with $47billion in December. Average daily turnoverdeclined by about 3 percent, to $2.3 billion in January.

Nonresidents' share of total trade (spot and forward transactions, options and swaps) increased inJanuaryto 44 percent, compared with 41 percent inDecember. The increase derived primarily from an increase in nonresidents' volume of activity in spot and forward transactions, and options.

Forex transactions with domestic banks, by instruments and derivatives ($ million)
Conversions (1) / Swapsa (2) / Cross Currency swape (3) / Optionsb (4) / Total volume of trade (1)+(2)+(3)+(4)
January-13 (Not final) / Total / 40,411 / 47,698 / 421 / 13,339 / 101,869
Daily average (21 days) / 1,924 / 2,271 / 20 / 635 / 4,851
Nonresidents / 16,003 / 21,074 / 0 / 7,093 / 44,170
of which Foreign financial institutions / 15,068 / 20,896 / 0 / 6,612 / 42,576
Residents / 24,408 / 26,624 / 421 / 6,246 / 57,699
of which Real sector / 6,699 / 2,460 / 354 / 3,569 / 13,082
Financial sector / 4,640 / 10,504 / 0 / 357 / 15,501
Institutions (incl. insurance companies) / 3,093 / 3,956 / 0 / 45 / 7,094
Individuals and provident funds / 600 / 137 / 0 / 336 / 1,073
The Bank of Israel / 0 / 0 / 0
Otherc / 3,147 / 47 / 0 / 67 / 3,261
Domestic banksd / 6,229 / 9,520 / 67 / 1,872 / 17,688
december - 12 / Total / 43,868 / 46,885 / 201 / 8,803 / 99,757
Daily average (20 days) / 2,193 / 2,344 / 10 / 440 / 4,988
Nonresidents / 13,316 / 23,706 / 0 / 3,766 / 40,788
of which Foreign financial institutions / 12,597 / 23,612 / 0 / 3,696 / 39,905
Residents / 30,552 / 23,179 / 201 / 5,037 / 58,969
of which Real sector / 9,271 / 3,358 / 92 / 2,005 / 14,726
Financial sector / 6,457 / 9,614 / 24 / 608 / 16,703
Institutions (incl. insurance companies) / 5,420 / 3,584 / 0 / 78 / 9,082
Individuals and provident funds / 676 / 243 / 0 / 432 / 1,351
The Bank of Israel / 0 / 0 / 0
Otherc / 2,964 / 66 / 0 / 63 / 3,093
Domestic banksd / 5,764 / 6,314 / 85 / 1,851 / 14,014
a Only one leg of the swap, i.e., the nominal value of the transaction (in accordance with the BIS definition).
b The notional value, that includes purchases and sales of put and call options.
c Including other entities such as portfolio managers, nonprofit organizations, national institutions, and those not included elsewhere.
d Total interbank trade, divided by 2
e 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.