Israel’s forex market has been stable since the start of 2024, and there was no volatility even after publication of Israel’s dire growth figures for the fourth quarter of 2023. The shekel even strengthened on Friday by 0.165% against the US dollar to NIS 3.636/$, and against the euro by 0.483% to NIS 3.935/€.
If the Bank of Israel Monetary Committee decides to make a second interest rate cut this year tomorrow, this could result in the shekel depreciating due to the widening interest rate gap with other currencies in Europe and the US, where central banks are delaying monetary relaxation.
US investment bank Goldman Sachs issued a survey on currencies at the end of last week, which also related to the shekel. The bank presented a forecast for the coming three months and expects the shekel to continue trading around the NIS 3.7/$ mark. But further into the future Goldman Sachs sees the shekel strengthening and says the shekel will appreciate to NIs 3.55/$ over the next year, with a continuing appreciation through until 2027.
The US investment bank believes that the Bank of Israel will cut the interest rate tomorrow from 4.5% to 4.25%. Goldman Sachs stresses that the shekel strengthening together with inflation moderating down to the Bank of Israel’s annual target range, “Has led to the likelihood of the Bank of Israel’s intervention in the market decreasing and will probably bring a greater focus by the bank on economic growth in the economy.”
The reasons for the strengthening of the shekel
Goldman Sachs stressed that despite the negative growth data published last week, the dollar strengthening against the shekel did not gain momentum and quickly faded. The explanation for this, the bank believes, was the market’s assessment that activity in Israel’s economy will rebound in the first quarter of 2024.
Other reasons for the shekel’s appreciation, according Goldman Sachs, are the big gains of US tech stocks. The shekel is sensitive to rises in stocks on Wall Street because institutional bodies in Israel need to balance their holdings portfolio and not further increase their exposure to foreign currency and thus sell foreign currency and buy shekels when share prices rise.
Goldman Sachs also observed that Israel’s growth figures also included some positive data. Israel’s export-import trade balance in the fourth quarter improved because the fall in imports to Israel was sharper than the fall in exports. The positive balance of payments indicates an undervaluation of the shekel and presents a possible appreciation of the Israeli currency in the future, says Goldman Sachs.
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The bank also noted that looking back at previous geopolitical crises in Israel, “Point to a significant influx of funds coming to Israel from abroad, either through external aid or through other factors, which increase pressures for the appreciation of the shekel.” Despite these funds, Goldman Sachs believes that Israel’s high risk premium will continue to be priced into the shekel’s exchange rate and create a certain balance with external aid.
Published by Globes, Israel business news – en.globes.co.il – on February 25, 2024.
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