All That Glitters / Is Fischer Defending a 92 Basket?

The Bank of Israel bought no less than $800 million in foreign currency on Tuesday in local markets, mostly from hedge funds - and all in one day.

That is not just a lot of money: A quick calculation shows that the central bank bought $100 million an hour, or $1.5 million a minute, or if you want: about $30,000 every second of the business day.

However you look at the numbers, it makes you dizzy. This is just another step in the bank's unprecedented buying frenzy over the past month.

On August 10, the Bank of Israel announced it was ending its policy of purchasing $100 million every day, but was not ruling out intervention at any time or any amount it saw fit. Forex traders called it the Stanley Fischer's "exit strategy" - a step that allowed the governor to end his commitment to buy foreign currency regularly without shaking up the market. But instead of daily purchases, the Bank of Israel started buying big at times it chose.

Around August 18, the central bank bought over $1 billion and continued to buy hundreds of millions more on other occasions. At the end of August, it turned out that during the month the bank stopped its regular purchases, but it actually bought a total of NIS 4.2 billion, over twice its earlier monthly purchases in 2009.

That outs the average daily purchase at about $200 million, compared to the previous $100 million. Even though Fischer has bought over $30 billion since the summer of 2008, he is still determined to stop the shekel's rise.

But what interests forex professionals now is this: According to what system does the Bank of Israel decide when and how much foreign currency to buy?

This is not just the million dollar question, as it is worth much, much more - a few billion at least.

The official answer is there is no such system.

In internal discussions, bank officials say they are not using the dollar's weakness as the criteria, but the shekel's strength - and the two are different. "We will not try to fight world trends of the dollar versus the euro," Fischer has said more than once in recent weeks.

But forex traders are not so sure. They think Fischer has acted in recent days as if he was defending an exchange rate of NIS 3.78, and is doing all in his power to make sure the shekel stays above this level. For many traders, that is where the border lies in the battles between Fischer and the hedge funds.

But the truth is the Bank of Israel is not using the shekel-dollar rate in its system. Instead, it is using a list of figures and currencies, as well as the identity of the sellers, trading volume, trends and volatility.

But the most important number used by the bank in its decision when to intervene in the market is a rate of a special currency basket known as the Nominal Effective Exchange Rate. This is a weighted basket of 28 currencies used by 38 countries, Israel's main trading partners. The dollar makes up 24.8% of this basket. And every time this basket nears the 91 point level, the Bank of Israel buys huge amounts of dollars. The bank refused to comment on the matter.

The battles may start again, and most traders think it is only a temporary cease-fire, but everyone agrees Fischer is not planning on quitting.