The shekel continued to strengthen against the US dollar this morning. The shekel-dollar exchange rate is currently down 1.56% in comparison with yesterday’s representative rate, at NIS 3.3658/$. The shekel-euro rate is down 1.01%, at NIS 3.5287/€. This follows a sharp depreciation of the shekel from the beginning of the year until May 10, when the shekel-dollar rate rose 11%.
The US dollar has weakened on world markets in the past two days. The US Dollar Index has fallen by 0.8%.
Prico Risk Management, Finance and Investments CEO Yossi Fraiman says, "The high inflation in Israel, with a 0.8% jump in the CPI in a single month, even before the sharp rise in the shekel-dollar rate has translated into import prices, means that the Bank of Israel is likely to act aggressively to halt inflation, with a 0.5% interest rate hike in the short term. The meeting of the bank’s Monetary Committee next week will be closely watched.
"In our view, the Bank of Israel will not hesitate to raise shekel interest rates, in line with the inflation figures and the rise in dollar interest rates. The Bank of Israel will maintain a positive interest rate gap in favor of the dollar, in order to moderate excess supply of foreign currency. The bank is aware, however, of the link that the transmission mechanism creates between depreciation of the shekel and inflation. The Bank of Israel will act to raise the shekel rate above 1.5% this year, meaning at least two more interest rate hikes. The expectation of a rise in shekel interest rates strengthens the Israeli currency, and can be expected to affect the mortgage market and contribute to cooling excess demand."
IBI chief economist Rafi Gozlan believes that in the medium term the shekel will revert to depreciating against the dollar. "The figures for activity in the foreign exchange market by investment institutions showed large net purchases of foreign currency until February (some $8 billion from December 2021 to February 2022), but without significant change in their foreign exchange exposure," he writes. "In March, by contrast, net foreign exchange purchases amounted to $4 billion, accompanied by a rise in foreign currency exposure from 16.3% to 16.9%. Taking into account the continuing negative trend on the markets, it is likely that in April and May too there has been a high level of net foreign currency purchases, while the sharp rise in the cost of hedging in the past few weeks, to 2.25-2.5% annually, also supports a reduction in the rate of foreign currency hedging. Therefore, the expectation of continued pressure by the US Federal Reserve to make financial conditions tougher, against a background of high hedging costs, supports a continuation of the trend of a depreciating shekel against the dollar."
Published by Globes, Israel business news - en.globes.co.il - on May 17, 2022.
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