The Bank of Israel set the shekel-dollar representative exchange rate at NIS 4.008/$ today, the first time that the exchange rate closed above this level since June 8, 2009. "Globes" spoke to leading analysts about the future.
Psagot Investment House Ltd. macro department manager Ori Greenfeld: "The weakening of the shekel against the dollar is mostly due to the strengthening of the dollar against leading currencies, including the euro. There is a local effect in which foreign residents are taking money out, especially from makams (short-term treasury notes) and government bonds, as a result of which we see the weakening of the shekel. I don’t know, and I don’t pretend to predict, in what direction the exchange rate will go, but I believe that the number 4 has no cosmic significance.
"Yesterday's political developments may have an effect, but it's only momentary, and its weight is marginal compared with the other factors affecting the exchange rate. The shekel-dollar exchange rate trend is mostly determined by what happens to the dollar in the world. In the current economic environment, it is more likely that we will see the European Central Bank carry out a quantitative expansion plan (buying bonds) before the US Fed does so. This will continue to support the dollar against the euro and the shekel."
Ministry of Finance chief economist Dr. Eldad Shidlovsky says, "We've examined the data. The shekel has depreciated 5% against the dollar since the beginning of the year, most of which occurred in May-July 2012. There are no major changes against the euro. Foreign residents withdrew $3 billion in financial investments, and at the same time Israelis have begun investing more heavily in foreign securities since the end of 2011, which also weakens the shekel against the dollar.
"The direction is partly explained by policy measures, including the cancellation of the exemption for foreigners on capital gains. The Bank of Israel also imposed a reporting obligation on transactions and holdings by foreign investors in makams, as part of the fight against hot money (speculators). If you exclude the depreciation of the shekel against other currencies, since the shekel has weakened against all of them, you reach a real depreciation of only 3% from the beginning of the year until now.
"According to our models, this depreciation should increase the export of goods by 2% over the next six months. This will boost GDP by 0.5%, amounting to an additional NIS 5 billion."
Meitav Investment House Ltd. chief economist Ron Eichal says, "The depreciation that we're seeing is the direct result of two key economic developments. The first is the ballooning balance of trade deficit, which reached $1.9 billion in June 2012. The second development is foreign investors' flight from Israeli securities, including makams and government bonds. These developments appear to have run their course, but for now they are setting the tone for the exchange rate.
"Another factor is that the Bank of Israel has cut the interest rate, which also weakens the shekel, because the attractiveness of the Israeli interest rate is being lost. The difference between us and the US and Europe is narrowing, weakening the potential of foreign currency players. The developments in the current accounts balance indicate the potential of further weakening of the shekel, albeit only slightly. The current trend does not support the shekel, and we've been saying this for a very long time."
Clal Finance chief economist Amir Cohenovich says, "Most of the effect on the currencies is due to interest rate differentials between the various economies. I'm not only talking about the current interest rate differentials in practice, but mostly about expected differentials in the future. The trend in Israel is clear: interest rate expectations in Israel have moderated, and the interest rate is projected to fall. This is seen following the drop in the Consumer Price Index (CPI) for June, as well as in May, which led to expectations of an expansionist monetary policy.
"The latest GDP data also show a drop in exports, an unexpected fall compared with the Central Bureau of Statistics' previous estimate. This figure also signals the Bank of Israel's wish to support exports, and the pressure to continue cutting the interest rate. At the same time, in the US, following Federal Reserve Board Chairman Ben Bernanke's speech, investors are slowly beginning to realize the QE3 that everyone was waiting for will not come soon, and expectations there have reversed: there won't be the aggressive monetary expansion that was expected. The interest rate differential will therefore narrow, which supports the depreciation of the shekel."
Published by Globes [online], Israel business news - www.globes-online.com - on July 18, 2012
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