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Israel’s foreign currency market in December 2010

By Bank of IsraelJan 09, 2011 03:44AM ET
Developments in the exchange rate––the shekel appreciated against the dollar as the dollar weakened around the world

The shekel appreciated by about 3.6 percent against the dollar during December and by about 1.1 percent against the euro. Against the currencies of Israel's main trading partners, the nominal effective exchange rate of the shekel, i.e., the trade-weighted average shekel exchange rate against those currencies, strengthened by about 2.0 percent.

In December, the dollar weakened against most major currencies––by about 2.6 percent against the euro, by about 3.0 percent against the yen and by about 6.2 percent against the Swiss franc.

For 2010 as a whole, the shekel appreciated by about 6.0 percent against the dollar and by about 12.9 percent against the euro. In terms of the nominal effective exchange rate, the shekel appreciated by about 7.0 percent during this period.

The volatility of the exchange rate––a drop in the actual volatility of the exchange rate and in the implied standard deviation

The standard deviation of changes in the exchange rate, which represents actual volatility, fell to a level of 4.8 percent in December, compared to 7.7 percent in November.

Average volatility for 2010 as a whole was 6.6 percent, which was lower than the volatility of the shekel/dollar exchange rate in 2008 and 2009 (14.7 percent and 11.2 percent, respectively).

The average level of the implied volatility in OTC (over the counter) forex options––an indication of expected exchange rate volatility––was 8.5 percent in December, compared with an average of 7.9 percent for all of 2010. For the sake of comparison, the implied volatility of foreign exchange options in emerging and developed economies averaged 12.7 percent and 12 percent, respectively, in December.

There was a particularly high volume of trade in swap transactions in December

The total volume of trade in foreign currency in December was about $146 billion, compared with about $131 billion in November and an average monthly level of $109 billion for 2010 as a whole. The volume of trade in spots and forward transactions totaled about $40.0 billion, a daily average of about $1.7 billion, similar to the daily average in November. Nonresidents' transactions in spots and forwards totaled some $12 billion in December, accounting for 31 percent of the trade in these instruments. The Bank of Israel purchased about $2.3 billion in December[1].

The year 2010 was characterized by high volumes of activity in the foreign currency market, particularly during the last quarter of the year. The average monthly volume of trade in 2010 stood at about $109 billion in comparison to about $87.3 billion in 2009 and about $95.5 billion in 2008. Most of the increase in volume from 2009 to 2010 was a result o the growth in swap transactions, from a monthly average of about $39.6 billion in 2009 to about $63 billion in 2010). In contrast, the volume of trade in spot and forward transaction was in fact lower in 2010 than in previous years (a monthly average of about $34 billion in 2010 as compared to about $36.8 billion in 2009 and about $41.5 billion in 2008).

The relative share of nonresidents in the total volume of trade (exchange, option and swap transactions) grew in 2010 to a level of about 62 percent, in comparison to about 54 percent in 2008 and 2009. This was primarily the result of the increase in the total activity in swap transaction. Nonresidents' relative share in exchange transactions (about 37 percent) was similar to that in previous years (about 34 percent in 2009 and 36 percent in 2008).
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