Israel’s foreign currency market in March 2011

Developments in the exchange rate––the shekel appreciated against the dollar in line with the weakening of the dollar world wide
The shekel appreciated by about 3.9 percent against the dollar during March, and by 1.2 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 appreciated by about 2.6 percent.

At the same time the dollar depreciated against most of the major currencies––by 2.8 percent against the euro, and by 1.5 percent against the Swiss franc. The dollar appreciated by 1 percent against the pound sterling, and by 1.1 percent against the yen.

The volatility of the exchange rate––the actual and the implied volatility of the exchange rate decreased in March
The standard deviation of changes in the exchange rate, which represents its actual volatility, continued to decline in March, and reached 6.3 percent, and drop of about 3 percentage points from the February level.
The average level of the implied volatility in OTC (over the counter) forex options––an indication of expected exchange rate volatility––averaged about 9.7 percent in March, compared with an average of 10.9 percent in February. For comparison, the implied volatility of the foreign exchange options of emerging markets averaged 11.1 percent in March, and of advanced economies, 10.6 percent.

The volume of trade in the foreign currency market––a continued decline in the daily volume of trade, and a drop in nonresidents’ relative share of trade
The total volume of trade in foreign currency in March was about $118 billion, compared with of about $112 billion in February and $154 billion in January. The average daily turnover continued to fall in March, and reached $5.3 billion, down from $5.6 billion in February and $7 billion in January. The volume of trade in spots and forward transactions declined in the past two months, and in March was $41 billion, compared with $45 billion in February and about $51 billion in January. Nonresidents' transactions in spots and forwards totaled some $15 billion in March, accounting for 37 percent of the trade in these instruments, compared with about 43 percent in February. The Bank of Israel purchased about $200 million of foreign currency in March.

The volume of trade in OTC foreign currency options (which are not traded on the stock exchange) totaled about $12 billion in March, compared with about $16 billion in February, and the volume of swap transactions was about $64 billion.
Nonresidents' share of total trade (spots and forward transactions, options and swaps) declined further to 47 percent of the total trade in March, compared with 51 percent in February and 60 percent in January.

In this context it should be mentioned that at the end of January 2010 the Bank of Israel announced new policy measures relating to the foreign exchange market and the debt instruments market: the intention to impose a new requirement to report transactions in foreign exchange and in debt instruments, and the imposition of a liquidity requirement for foreign exchange transactions that went into effect in February. At the same time the Ministry of Finance announced that it intended to equalize the tax rates on short-term debt instruments applicable to nonresidents and residents.