Why is the Israeli shekel so weak?
Since August 5, conditions in the market have made it less worthwhile to hold shekels, because the Israeli banks were willing to pay almost 1% annual interest on dollar deposits.
After the cannons have stopped roaring and an arrangement between Israel and Hamas is emerging, the shekel is suddenly showing weakness. The shekel slumped 0.7% against the dollar today, following a plunge of over 1%, and reaching its weakest point for six months against the dollar: $3.52/$. Against the euro, the shekel which reached an all-time high during the fighting, sank over 1% yesterday, and continued its slide today. The shekel's performance against the British pound was similar. Following a period of strength, the shekel is becoming less solid. The economists are now busying themselves by trying to explain what is happening.
Since August 5, conditions in the market have made it less worthwhile to hold shekels, because the Israeli banks were willing to pay almost 1% annual interest on dollar deposits, and that's a lot," forex specialist and trader Yossi Frank told "Globes" today. "At the same time, several horrifying figures for the Israeli economy were published, including negative growth and inflation data, and we're hearing more combative statements by the Bank of Israel following these figures and seeing actions like those of last Friday after the representative exchange rate was published: massive dollar purchases. For a central bank, that's not an everyday measure."
Frank therefore believes, "There are now enough parties who believe that selling the shekel is better than buying it, and we're therefore seeing a one-directional movement towards devaluation in the Israeli currency." According to Frank, this trend can be expected to continue. Furthermore, "If parties in Jerusalem behave wisely, we could see an even more dramatic devaluation, with a convergence to an equilibrium of NIS 3.80/$ - an exchange rate the Bank of Israel would like to see." Frank added that the Bank of Israel should now "make sure that this trend should not be reversed."
In the long term, Frank says that the solution of a floor or minimum rate is an effective solution to the exchange rate problem. "In contrast to the Bank of Israel's worries, I don't think that setting a floor rate would have caused an assault on the exchange rate like the one that occurred in 1998. On the contrary; it would have generated a shekel devaluation, and brought the exchange rate to an equilibrium rate within a relatively short time, to the benefit of the entire economy."
Calm down no drama
Harel Insurance Investments and Financial Services Ltd. (TASE: HARL) chief economist Ofer Klein wants to make it clear: nothing dramatic is happening here. "If you look at the forex market over the past six weeks," he says, "the dollar has strengthened against the shekel by more than 2%, but also against the euro and British pound by 2.5%, by 2% against the Swiss franc, and by as much as 3.5% against the Brazilian real. There's a global trend here towards a stronger dollar, and we should calm down. You can't talk about a collapse of the shekel; it's a good period worldwide for the dollar. The dollar's strengthening against the shekel is not exceptional, and is even more moderate than its advance against the real. We're part of a global trend."
Klein is actually asking two main questions: what caused the shekel to remain outside this global trend until now, and what has happened in recent weeks, when the shekel joined the global trend. "Over the past two years, there were a lot of very strong fundamental factors strengthening the currency," he explains, "such as the gas discoveries; the real interest rate gap between the shekel and the other currencies, which brought a lot of capital into Israel; the massive acquisitions of Israeli companies by foreigners and the overseas offerings by Israeli companies, which also caused a capital inflow; and of course the current account surplus, which totaled $3.5 billion just in the first quarter, an all-time high."
In the past two weeks, however, there were several developments that pushed the shekel down: the Bank of Israel lowered the interest rate to a low point, which narrowed the interest rate gaps and raised hedging costs, making it more difficult for speculators to conduct shekel-dollar transactions; the war in the south, which caused a dramatic rise in the Defense Ministry's budget requirements that aroused concern about a higher 2015 budget deficit; and the publication of negative growth figures, including a steep decline in exports that is expected to weaken the Israeli currency. "These three factors pushed the shekel into line with the global trend," says Klein, who predicts that the exchange rate will stabilize to some extent, "because the fundamental factors won't change in the long term: gas will continue flowing, and foreigners will go on acquiring Israeli companies," but the pressure towards a shekel appreciation that has prevailed for the past two years has eased.
Prico investment house CEO Yossi Fraiman asserts that the dollar is not necessarily strengthening against the main currencies because of foreign players. "The Bank of Israel reports indicate that the share of foreigners in the forex market has dropped below 30%, showing that the Bank of Israel is the main player in the strengthening of the dollar in the local theater," he says.
According to Fraiman, the summer vacation is also a factor in the trend. "We're in the summer vacation time, when many traders are on vacation, and the number of traders and volumes of trade are lower. Significant individual activity, as has recently occurred, can cause a strengthening of the dollar, even if trading volumes are not particularly high."
Fraiman believes that the shekel's weakening is temporary: "In the long term, given the structure of the domestic forex market, which suffers from falling demand and excess supply, without a fundamental measure that will create permanent demand for the dollar, it is likely to go on weakening."
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