Bank of Israel Report Reveals Key Factors Behind Shekel Weakness
Translated & summarized from Ice by baba
The Bank of Israel reported that the Israeli shekel weakened by up to 2.9% against the dollar in the third quarter of 2026 due to shifts in institutional investor behavior. Major institutional investors significantly reduced their net foreign currency sales, while banks moved to net purchases. The business sector also bought fewer dollars, contributing to the shekel's decline. Despite lower actual volatility, market expectations for future shekel volatility remain high.
The story in 5 lines · by baba
- The Israeli shekel weakened by up to 2.9% against the dollar in Q3 2026, according to the Bank of Israel.
- Institutional investors drastically reduced net foreign currency sales, impacting shekel support.
- Commercial banks shifted from net foreign currency sales to significant net purchases.
- The business sector's dollar purchases decreased substantially during the quarter.
- Market expectations for future shekel volatility remain unusually high compared to global markets.
The Israeli currency, the shekel, experienced a notable decline against major global currencies during the third quarter of 2026, according to a new report from the Bank of Israel. The shekel weakened by approximately 2.9% against the US dollar and 2.4% against the Euro. On a broader scale, it depreciated by 2.8% against a basket of currencies from Israel's main trading partners. This weakening occurred despite mixed global trends for the dollar, which saw modest gains against the Euro and Swiss Franc but significant losses against Asian currencies like the South Korean Won and Japanese Yen.
The primary driver behind the shekel's depreciation was a significant shift in the trading activities of major economic players. Institutional investors, including pension funds, provident funds, and insurance companies, which heavily influence the shekel due to hedging their foreign investments, drastically reduced their net foreign currency sales. These sales dropped to about $4.4 billion in the third quarter, a sharp decrease from the massive $13.8 billion in the preceding quarter. This reduction in dollar supply lessened support for the shekel.
Concurrently, the financial sector, primarily commercial banks, reversed its position, moving from net sales of approximately $1.1 billion in the previous quarter to net purchases of foreign currency totaling about $3.7 billion. In contrast, the business sector significantly curtailed its dollar purchases, falling from $12.1 billion in the second quarter to just $1.7 billion in the third. Foreign residents maintained relatively stable net foreign currency sales of around $6.5 billion, while the Bank of Israel did not actively intervene in the market by purchasing foreign currency throughout the quarter.
The report also highlighted a divergence between actual currency fluctuations and market expectations. While the realized daily volatility of the shekel-dollar exchange rate decreased, the implied volatility, reflecting traders' future expectations, saw a slight increase. This implied volatility remains unusually high compared to global emerging and developed markets, indicating a persistent premium for uncertainty and expected volatility in the local market. Overall daily trading volume in the local banking system decreased by 9.1% to $16.0 billion, largely due to fewer direct conversion transactions. However, foreign investors increased their presence, with their share of total trading volume rising to 41.4% by the end of the quarter.
