Merrill Lynch analysts Turker Hamzaoglu and Jean-Michel Saliba say that they remain fundamentally bullish on the shekel. Their fundamental valuation model shows a fair value for the shekel-dollar exchange rate to be NIS 3/$.
The analysts point to their expectation of a further widening of the rates differential with G10 economies, and Israel's current account surplus, as a basis for their optimism. They see a stronger shekel against a basked of major currencies, though they say the shekel will "struggle to strengthen against the dollar" for the remainder of this year as the dollar gains against the euro.
In 2011, the analysts expect the shekel to weaken against the dollar, as well as a euro-dollar basket, as interest rate increases are priced in, and the current account surplus diminishes.
Merrill Lynch expects the exchange rate to rise to NIS 3.8/$ by the end of 2010, and to rise to NIS 3.9/$ by the third quarter of 2011.
Hamzaoglu and Saliba expect a further 25 basis point interest rate hike, to bring the 2010 year-end rate to 2.25%, and they forecast a year-end 2011 rate of 3.5%. They say, "In its September statement, the Bank of Israel struck a hawkish tone, highlighting the continued strength of the domestic economy and sturdy housing inflation. In particular, the “high degree of uncertainty” line in reference to the global economy was deleted this time around."
They also noted that the Bank of Israel decreased its expected policy rate in 12 month’s time to 2.7% from 3% previously, "likely reflecting the fact that the slowdown in the global economy would diminish the window of opportunity for rate hikes in 2011."
The analysts, saying that data flow has "painted a firmer recovery than we had expected", raised their 2010 GDP growth forecast to 4% from 3.5% previously on the back of stronger domestic demand and surprisingly sturdy exports.
Hamzaoglu and Saliba forecast the current account surplus to slide from 3.7% of GDP in 2009 to 1.3% by 2011 on deteriorating trade and income balances. "Imports look set to outpace exports from late 2010 on firmer domestic demand and weaker external outlook. The still strong external balance should lend support to the ILS."
Merrill Lynch was bought by Bank of America in 2008 and is now a wholly-owned subsidiary of the bank.
Published by Globes [online], Israel business news - www.globes-online.com - on October 3, 2010
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