This morning, the shekel-dollar exchange rate fell below NIS 3.50/$, the threshold that many believe that the Bank of Israel will use every means at its disposal to protect. The threshold has been crossed and we must now see just how determined the central bank is to repel the assault by investors, mostly foreigners, on the local foreign currency market.
We can already say that the Bank of Israel and the Ministry of Finance have largely failed to repel this assault, even if we take into account that were it not for the policy of limited intervention taken, the exchange rate might be lower. Nonetheless, this argument is utterly irrelevant for Israeli exporters and does not help protect even one job.
The Bank of Israel interest rate is now 1%, and it is very doubtful whether a 25-basis point, or even a 50-basis point, cut will help in the war against the shekel appreciation. Although almost every central bank in the world faces a similar situation, it is doubtful if this is any comfort to Governor of the Bank of Israel Dr. Karnit Flug and Minister of Finance Yair Lapid.
In the rules of the game between the dealing rooms and investors on one side and the Bank of Israel and the Ministry of Finance on the other, the only thing that can have an effect is the fear of heavy losses in an instant, and the only thing that can generate this fear is determined action by the Bank of Israel to defend the exchange rate.
In 2009, foreign banks quickly closed their exposure to the shekel, after massive intervention by the Bank of Israel in the foreign currency market. Its intervention boosted the shekel-dollar exchange rate to NIS 4.26/$ in May 2009. When the exchange rate crosses the resistance levels that the models set for a U-turn, things can snowball fast.
If there is enough fear, the process feeds on itself and accelerates, just as has happened in the past few days. But what sufficed in 2009 is no longer enough, and it is necessary to review the arsenal available to Lapid and Flug. There are a variety of tax measures, for example: from the most extreme - levying a tax on short-term capital transactions - to the least extreme - cancelling the exemption for foreign investors on profits on long-term unlinked Shahar government bonds. This could be combined with other, more direct, measures. It is possible, if you want to cause damage and fast losses, to follow the example of the Czech National Bank, which in early November set a minimum exchange rate that was 5% above the exchange set until that date, and announced that it would buy unlimited foreign currency at that rate for an unlimited period.
There are many disadvantages to such a measure, but the question is whether in the cost-benefit analysis the Bank of Israel should announce that it will buy unlimited foreign currency at NIS 3.70/$.
But even if we conclude that this ammunition should be saved for another day, unpredicted measures can and should be taken into account to put the other side on the defensive, such as massive purchases when turnover in the foreign currency market is low, at certain times during the day, or purchases in the last week of the year. Any such action will be welcome, provided that the message of determination is included. Half steps, hesitation, and actions that do not cause fear and anxiety should stay on the drawing board, as they cause more harm than good.
Published by Globes [online], Israel business news - www.globes-online.com - on December 10, 2013
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