The foreign exchange market in Israel has witnessed severe fluctuations over the past eighteen months, due to political uncertainty in Israel and then the war. The shekel, whose value had already fallen dramatically during disputes over judicial reform, weakened further as a result of the war, trading at one point at 4.08 shekels to the dollar. But the Israeli currency was able to recover to around 3.70 shekels to the dollar.
Without the turmoil of the past 18 months, many believe the shekel would have been stronger than NIS 3 to the dollar. This is mainly due to the fact that in 2022, the shekel was one of the strongest currencies against the dollar. The Bank of Israel recently presented a model showing that without the effects of the war and judicial reform, the Israeli currency would be trading today at 3 shekels to the dollar, 0.70 shekels lower than the current exchange rate.
The Bank of Israel's calculations are clear, as it expected the price of the shekel to be affected by the effects of rising American markets, because there is a strong relationship between Wall Street and the shekel. If the correlation is maintained, we will see the shekel continuing to strengthen following sharp increases in the US market.
Boria Finance Chairman Or Boria explains that the reasons for the recent fluctuations in the shekel price were short-term. “Every event that occurs affects the market for only a short period, after which the market recovers,” he says. Were it not for Israel's internal problems, Boria estimates that there would have been an appreciation of the currency by about half a shekel, against an exchange rate of 3.2 shekels to the dollar.
Boria says the reason the shekel is currently strangely stable is that risks in Israel have already been priced into the foreign exchange market. “Without a change in the current situation here or there, the market will continue to contain a risk premium and sensitivity to events,” he explains.
Not only does the link to US markets make one feel that the shekel is in the wrong place, but Israeli internal data also continues to indicate this. Even before the war, Israel's economic picture looked excellent: the debt-to-GDP ratio was low, the deficit approved in the original 2023 budget was considered constrained in light of the expected decline in revenues, and even if the government did not contribute to Israel's long-term goals, the The economy is strong.
To date, local data is positive. Earlier this week, the Central Bureau of Statistics reported that Israel's current account surplus reached $6.7 billion at the end of the first quarter of 2024. Although the figure is lower than the previous quarter, it is higher compared to the previous year. The balance of payments shows money entering Israel compared to money leaving, so the presence of a surplus in the balance indicates more money entering the country than leaving it, and this contributes to strengthening the shekel.
“When there are no extreme events and increased risks, the balance of payments is a very important landmark,” Jonathan Katz, chief economist at Leader Capital Markets, tells Globes. “It indicates the strength of the economy and shows an increase in exports over imports and can influence… On the shekel in the long term.” This is a positive benchmark for rating companies and foreign investors, explains Katz. He added, “There is a surplus in exports, and this means that the main powers have foreign currencies entering the country, and this is expected to strengthen the shekel.”
Another essential element is real foreign investments in Israel. This factor, which includes capital raised by technology companies, has strongly supported the shekel in the past, Katz explains. In the first quarter of the year, the pace of increase in these investments decreased. Direct investments by residents abroad in Israel in the first quarter of 2024 rose by $1.2 billion, compared to a rise of $2.6 billion in the previous quarter. “This element is barely supporting the shekel currently,” Katz emphasizes, but adds that there are signs of recovery, and if investment volumes return, this will be very good news for the Israeli currency.
Recently published data that Katz also refers to is financial capital movements – what corporate bodies do with their investment portfolios. Since the unrest in Israel began, there has been an increase in these entities' exposure to foreign exchange. However, Katz notes a slowdown: “In April, Israeli institutional entities sold net foreign currency worth $3.4 billion (after selling $2.8 billion in March). Institutions reduced their foreign exchange exposure (in relation to total assets) to 21.7% in April from 22.6% in March, and the selling of foreign currencies by institutions in April was partly due to increases in the value of stocks abroad.
Katz says that in April it was possible that institutions (mainly insurance companies) preferred to reduce their foreign exchange exposure due to some optimism about the approaching ceasefire.
Major foreign banks are optimistic about the shekel
Despite everything, major international banks expect a positive future for the shekel. For example, Swiss bank EFG International predicts that the shekel will rebound and strengthen later this year, and anticipates the possibility of the dollar falling below 3.6 shekels/dollar. Boria also believes that the shekel is expected to continue to rise, and as the war nears its end, or a hostage deal is concluded, the value of the Israeli currency is expected to rise again. But apparently, as long as the uncertainty surrounding what is happening in Israel is great, the shekel will maintain a certain decline in its value compared to its real value.
The main factors clouding the markets mainly come from the war in which Israel is involved, but the country's internal data remains positive. This is clearly evident in Israel's credit rating: despite extremely low prices on the markets, rating companies gave the country high marks even during the war.
However, the flight of capital and the preference of the wealthy to remain elsewhere while Israel drowns in Gaza, could affect Israel's economic future. If wealthy investors do not return, the previously mentioned factors that have supported the shekel in recent years will no longer be relevant and it will take years for the state to rehabilitate them.
Published by Globes, Israel Business News – en.globes.co.il – on June 20, 2024.
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