Israel's strong economic performance will lead to a strengthening of the shekel to NIS 3.5/$ by June, according to a review by Bank of America Merrill Lynch. According to the investment house's COMPASS model, the shekel is 20% undervalued against the US dollar. There is no foreign currency trading today, but trading in currency options reflects a 0.5% appreciation of the shekel to NIS 3.73/$. Because of the Passover holiday, the Bank of Israel will not publish representative rates for the next two days.
Merrill Lynch sees the shekel strengthening gradually in the near term because of Bank of Israel intervention to put a brake on appreciation, but predicts that the central bank will exit the market completely in the medium term, which will allow the shekel to appreciate substantially. The report calls the shekel "the best defensive asset in emerging markets foreign exchange."
The report predicts 3.5% growth for the Israeli economy this year, compared with 0.7% in 2009, with growth accelerating to 4% in 2011.
On interest rates, the report says, "May will likely be the latest date for the next hike," and projects a 3% Bank of Israel rate by the end of the year. Noting that Governor of the Bank of Israel Stanley Fischer is staying on for a second term, the report says, "the market will most likely expect continued credibility under Fischer's lead through the transition."
Published by Globes [online], Israel business news - www.globes-online.com - on March 28, 2010
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