Stop-loss Orders, Options Expiries Dragged Down the Dollar-shekel

The official exchange rate of NIS 4.066 isn't close to the prices in the market, say traders

The dollar weakened by 1% in the local forex market, falling well below the psychologically significant barrier of NIS 4.10 per $, to NIS 4.066. Earlier in the day, the greenback had been down even more.

However, a leading local trader ascribed the dollar's slide today to a combination of three factors: the dollar's drop against the euro in world markets, stop-loss orders, and the expiry of several major futures that had been denominated in the dollar.

Stop-loss orders are set in place when the investor fears a sudden unfavorable development in the currency or security. To avoid losing too much, they give their broker a specific exchange rate (in the case of currency) or share price at which the asset must be sold.

Traders report that the greenback's retreat today triggered several such stop-loss mechanisms.

For months the shekel has been appreciating against the dollar, partly because the USD has been weakening against other currencies, and partly because of the brisk influx of foreign capital to Israel, which is greater than the outflow of foreign currency. Foreign investors are putting money into stocks, bonds, companies and startups, and in recent months, in real estate too.

Exacerbating the dollar's slide today was the expiry of a major financial futures contract, or several contracts, that required their holders to sell dollars. "These contracts were denominated at the representative rate, and therefore, somebody had in interest in lowering the representative exchange rate downwards," one trader said.

The traders conclude that the official exchange rate set by the Bank of Israel today does not reflect genuine pricing levels. The procedure is for the central bank to sample transactions carried out shortly before 15:00. The representative rate is the average of these transactions.

The official exchange rate of NIS 4.066 is significantly above the prices of the actual transactions, say market sources. "In those minutes there was not one single deal above NIS 4.059," a dealer at one of the banks said.

The reason for the gap between the Bank of Israel exchange rate and pricing levels quoted by banks is not known. But there is precedent for the central bank to set the exchange rate at a different level from the quotes in the marketplace. Sometimes the central bank "corrects" undue influence by a single bank, suggest market sources, or similar distortions in the marketplace.