Shekel depreciation accelerates – Globes

This week’s trading in the foreign exchange market opened with further weakness for the shekel against major currencies. The shekel-dollar exchange rate is currently up 0.55% compared to Friday’s representative rate, at NIS 3.8279/dollar, and the shekel-euro rate is up 1.99%, at NIS 4.1932/euros.

Last week’s trading once again demonstrated how sensitive financial markets, including the foreign exchange market, are to geopolitical developments. The shekel weakened by about 2% last week against the US dollar, with representative rates on Friday set at NIS 3.8070/USD and NIS 4.1114/EUR.

The impact of fears of escalation in Israel’s conflict with Hezbollah in Lebanon and with Iran was evident on the Tel Aviv Stock Exchange yesterday, with the Tel Aviv 35 index down 2.5% and the Tel Aviv 90 index down 1.8%. Technology stocks were down about 4%, and so far this morning the Tel Aviv 35 index is down 2.18% and the Blue Tech Global index is down 3.23%.

The weakness of the shekel against the US dollar comes despite the weakness of the dollar itself in global markets. Last month, the euro rose against the dollar by about 1%.

“Geopolitics is stronger than dollar volatility in global markets,” risk management expert Shmuel Berger told Globes, explaining why a weaker dollar won’t boost the shekel. “If there is an attack by Iran or its proxies that causes significant damage, we are likely to see a regional escalation, in which case the shekel-dollar exchange rate could reach NIS 3.9 or higher,” Berger said.

In this case, Berger explains, Israeli financial institutions will have to change their investment portfolios in line with their exposure to the dollar. “This will reinforce the depreciation of the shekel, and will strengthen foreign investors and speculators who operate in the foreign exchange market and move the exchange rate according to security events.”

High volatility

In Berger’s view, in an extreme scenario, the shekel-dollar exchange rate could reach 4 shekels. But in a more optimistic scenario, where the Iranian and Hezbollah reaction to the recent killings of senior Hamas and Hezbollah figures is muted and the region calms down, Berger estimates that the shekel will rise slightly, and the shekel-dollar exchange rate will fall below 3.8 shekels.

“The rise in the risk premium in Israel is evident in all instruments and of course in the foreign exchange market as well,” says Rafi Gozlan, chief economist at IBI Investment House. “Two weeks ago, the market sentiment was going the other way, with expectations that things would calm down and there might be a deal to release the hostages, but now we have a 180-degree turn.” However, Gozlan estimates that the impact on the investment portfolios of financial institutions is relatively low, and that we will not see a sharp depreciation of the shekel.

Will the Bank of Israel intervene?

Gozlan believes that if the shekel’s depreciation reaches a certain point, the Bank of Israel will be forced to intervene. “The bank does not intervene at current shekel levels, but market players know that it will intervene at high rates – more than 4 shekels to the dollar.”

Under the plan put forward by the Bank of Israel at the beginning of the war, $30 billion was allocated for sale, with the aim of stabilizing the foreign exchange market. So far, the bank has sold only $8.5 billion.

The speed of the shekel’s depreciation will also affect the Bank of Israel’s response, Gozlan adds. “If the shekel falls quickly, the Bank of Israel will see it as a market disruption and will intervene.”

This article was published in Globes, Israeli Business News – en.globes.co.il – on August 5, 2024.

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