Analysts weigh in today about the recent shekel strength against the dollar. "Following the export figures on one hand, and inflation on the other, which were published in recent weeks, we have slightly lowered our forecast for the shekel-dollar exchange rate," says Harel Finances chief economist Michael Sarel.
"This is because exports look a little better and inflation is higher, and the Bank of Israel's concern about the shekel's strength now appear to be more modest. It is therefore reasonable to assume that this brings closer the date at which the Bank of Israel will stop its intervention in the foreign currency market. It could be that the market thinks the same, and is pricing the shekel against the dollar accordingly.
"The interest rate decision is due today, and the Bank of Israel is again not expected to raise the interest rate. The Bank of Israel will mention rate hikes in the coming months, and it will announce the termination of its intervention in the bond market. It will also announce a reduction in its foreign currency reserves. I assume that this will be more gradual.
"It's impossible to know how much of this is already reflected, but it's possible that the fact that the shekel has strengthened in the past two months reflects market players' expectations that the intervention will end in a couple of months. It's not certain that the shekel will strengthen further."
Bank Leumi chief economist Gil Bafman says, "Some of the process we're seeing today is not only caused by the shekel, but by the weakness of the dollar in international markets. This is not surprising, because basic forces support the strengthening of the shekel - the balance of payment surplus, continuing strategic capital inflows to the Israeli economy in total contrast to other places in the world, as well as expectations about interest rate.
"Today's interest rate decision is less relevant, but the consensus holds that Israel's interest rate will begin to rise sooner than elsewhere. At that point, interest rate differentials will also go in the direction of a stronger shekel, which is why the direction is not surprising.
"I would add to this a number of surveys published last week around the world, which explicitly said that the shekel will continue to strengthen. It helps to stress the fundamental factors that are very pro-shekel. This appreciation will mainly hurt exporters, and it works against them, because it’s a real appreciation."
Published by Globes [online], Israel business news - www.globes-online.com - on July 27, 2009
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