Shekel has gained this year against some currencies

The volatility in the foreign exchange market in Israel has been going on for a few months, and sharp changes in the representative rate of the shekel have become routine. Only yesterday, the Bank of Israel set the representative shekel-dollar rate 1.127% higher than Tuesday, at 3.679 shekels / dollar, and the representative shekel-euro rate was set 1.233% higher than on Tuesday, at 4.031 shekels / euro.

In the past three months, the shekel has fallen by 2.3% against the US dollar and 3% against the euro. However, when checking the movement of the shekel against the basket of major currencies that make up the nominal exchange rate, the value of the shekel has depreciated only slightly over the past three months and even strengthened over the past month.

This trend is mainly explained by the sharp depreciation of the Turkish Lira and the Chinese Yuan, which together contribute 15.2% to the nominal exchange rate.

Link to the Turkish lira

The depreciation of the Turkish lira has been a process that has been going on for several years. Against the US dollar, the Turkish currency is down 44% in 2021, 30% in 2022 and down 39% since the start of 2023. Less than a month ago President Recep Tayyip Erdogan was re-elected for a third term, and that saw the lira drop more than 15% .

At the same time, the Central Bank of Turkey raised the interest rate from 8.5% to 15% due to inflation, which last October reached a record annual rate of 85.5%. After the recent interest rate hike, the value of the Turkish lira fell by 2% against the US dollar.

Regarding the yuan, weak growth data in China and a disappointing stock market performance weighed on the Chinese currency.

Ronen Manahot, Mizrahi-Tefahot’s chief market economist, explains, “An examination of the nominal exchange rate over the past three months shows that the shekel has depreciated only 0.5%. Moreover, since the beginning of the month, the shekel has strengthened by 3.5% against a basket of currencies. How did that happen?” Compared to the dollar and the euro, the shekel has weakened over the past three months (by 2.3% and 3%, respectively), and has strengthened since the beginning of the month (2.9% and 1.3%).

However, the shekel has appreciated against the Chinese yuan by 2.6% in the past three months and by 4.2% since the beginning of the month. As mentioned, the yuan makes up 11.5% of the nominal rate – an important weight. Most notably, the Turkish lira has fallen against the shekel by 33% in The past three months and 27% since the beginning of the month alone, and according to its weight of 3.7% in the nominal price, it contributed in full proportion to the strengthening of the shekel against the basket during this period.

Uri Greenfield, chief strategist at Psagot, adds, “The difference in the performance of the shekel against the euro and the dollar and in front of the basket of major currencies is mainly related to the weakness of the Chinese yuan and the Turkish lira, which together make up about 15% of the composition of the currency basket. The Turkish lira suffered from a sharp depreciation in the currency’s value. In recent years, which has deepened recently after the sharp rise in interest rates in the country, the Chinese yuan also weakened against the dollar due to weak economic data presented by China as well as the government’s decision on monetary expansion, which also contributed to the currency’s weakness.

IBI chief economist Rafi Gozlan says, “In the second quarter, the shekel exchange rate continued to fluctuate wildly, mainly due to the impact of developments on the political-judicial issue. Thus, after a lull in the first half of June, it weakened again in the days The latter is due to fear of renewing legislative initiatives to weaken the judicial system, as well as fear of violating the independence of the Bank of Israel and question marks about the continuation of the governor’s mandate.

Thus, the increase in the risk premium on the economy is reflected in the renewed weakness against the dollar and the euro. On the other hand, the changes in the nominal exchange rate of the shekel in the past month and quarter are more moderate than against the euro and the dollar, and this is due to the weakness of the Chinese yuan and the sharp depreciation in its value The Turkish lira, which together constitutes about 15% of the currency basket.

Published by Globes, Israel business news – en.globes.co.il – on June 29, 2023.

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