Shekel gains strongly after Sinwar’s demise

The shekel rose strongly this morning after the Israeli army confirmed last night that it had killed Hamas leader Yahya Sinwar. In interbank transactions, the shekel-dollar price decreased by 1.40%, reaching 3.71 shekels/dollar, and the shekel-euro price decreased by 1.77%, reaching 4.023 shekels/euro.

The main question in the wake of Sinwar’s death is whether it will lead to rapid diplomatic progress or whether the fighting will continue. Amid all this uncertainty, economists are trying to understand the significance of this latest turn in the conflict and whether the end of the war is closer, or whether it is just another milestone in a long-running war.

Mizrahi-Tefahot Bank chief economist Ronen Menachem told Globes that there is no certainty about how events will impact the forex and stock market. He says: “Everything depends on the question of whether the development will be considered further away from the political solution in general, and the hostage issue in particular, or whether it will bring it closer.”

“If the removal does not have political follow-up, the positive impact may fade over time.”

Menachem explains that the reaction in the foreign exchange market will likely be positive at first, but after that it depends on this question. Stock markets, according to him, will depend on “the continuation of the political process, Hamas’ reaction, etc. If the judiciary does not have political follow-up, the positive effect may fade over time. Also, its northern front has recently become a separate issue from the southern issue, Events there also have a strong impact on the market depending on what happens there.”

Modi Shefrier, chief financial markets strategist at Bank Hapoalim, agrees and believes the market response will be positive. “I think the elimination of Sinwar signals to the markets that the chances of reaching a hostage deal are closer than ever, and may be implemented faster,” he says. According to him, the hostage deal would mean the end of the war and therefore “this will be a very positive signal for the markets and also for the strengthening against foreign currencies.”

Will the shekel eventually return to 3 shekels/$?

It seems that the hopes that followed the death of the Hamas leader carry with them expectations of a strengthening of the shekel and the Tel Aviv Stock Exchange (TASE). In general, analysts expect a significant improvement in the state of the Israeli economy.

Since the beginning of 2023, the Bank of Israel has calculated that without the war and before that the social and political crisis, the shekel would have reached 3 shekels to the dollar. But it is not clear whether this will happen after the war.

Menachem says the shekel’s value reflects “the security situation as well as other issues such as the growing fiscal deficit, inflation that is still above the target range, the political environment and general uncertainty. It had weakened even before the outbreak of war.” “.

This means that without improving these issues, there will be little room for maneuver to raise the value of the shekel, and thus its ability to strengthen will remain limited. However, Menachem said: “In a scenario of a political breakthrough, such as the US-Saudi arrangement, the shekel is expected to register significant strength.”

Is an interest rate cut finally on the horizon?

An easing of the security situation could certainly lead to lower inflation and even a cut in interest rates by the Bank of Israel. Much of the rise in inflation during the war was due to the effects of fighting in the south and north, which led to higher prices for fruits and vegetables and higher flight prices. The shortage of Palestinian labor also harmed the construction sector, and the number of homes built during the war years decreased.

A certain stability in the markets coupled with low inflation will allow the Bank of Israel to lower the interest rate, after over the past year it focused mainly on financial stability and the fear of inflation rising above the upper limit of 3%. stability range. Senior bankers were expecting at least one interest rate cut this year, and in early forecasts they expected the cuts to reduce the interest rate from 4.5% to 4%. These expectations evaporated as the fighting intensified and the risks began to materialize in the north. In any case, markets will have to carefully consider the next steps in the war, and determine whether Israel is headed toward a long-term calm, or whether the fighting will continue for the foreseeable future.

Published by Globes, Israel Business News – en.globes.co.il – on October 18, 2024.

© Copyright Globes Publisher Itonut (1983) Ltd., 2024.