The rally on the Tel Aviv Stock Exchange in recent days has not benefited the dollar in terms of the shekel. The US currency has lost 3% against the shekel over the last week, and today with the opening of a new foreign currency trading week the dollar lost 1.45% to close at NIS 3.811/$. This returns the dollar down to the level that it was trading against the shekel back in November 2008.
The enthusiasm with which investors have been buying up equities goes a substantial way towards explaining the weakness of the main foreign currencies against the shekel, as they are considered a more defensive and conservative option than the shekel.
The shekel also strengthened significantly against the euro today by 0.92% to NIS 5.446/€. The positive sentiment on Tel Aviv’s capital market and the absence of alternative products is pushing Israelis and foreigners to buy large amounts of shares.
In announcements about interest rates, the Bank of Israel has frequently stressed that one of the reasons for a zero percent interest rate environment is an attempt to push investors towards higher risk products. It may well be that the positive macroeconomic data of the past week has strengthened the feeling among Israelis that “the worst is behind us” and convinced investors to buy shares.
Foreign currency trading was conducted today amid expectations of Bank of Israel Governor Stanley Fischer’s decision regarding the level of interest rates. Even though most analysts, and the market, expected the interest rate to remain unchanged at 0.5%, everybody will rush to read carefully through Fischer’s announcement. This will be in order to glean messages about the Bank of Israel’s future monetary policy, including what will happen with the interest rate and in particular to try and find clues as to when the central bank will stop its daily $100 million purchases of foreign currency, which influence the NIS/$ exchange rate.
Despite expectations that there will not be a change in the interest rate today, the pressures to raise interest rates are clear, with inflation beginning to rear its head in a dangerous manner. Raising interest rates in the next few months, while US interest rates remain at the present level of 0%-0.25%, will create an interest rate gap in favor of Israel, which will support a strengthening of the shekel against the dollar.
Fischer, who is determined to support Israeli exports and growth, and is currently less concerned about inflation, is aware of this and is expected to remind us of this in today’s decision.
The future of the Bank of Israel’s foreign currency purchasing program, with growing pressures to stop it, may determine the future direction of the foreign currency exchange rate no less.
Published by Globes [online], Israel business news - www.globes-online.com - on July 27, 2009
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