Stock markets in the US are closed today for Labor Day, but the week has begun stormily on the foreign exchange market. The shekel-dollar exchange rate is currently 0.93% higher than Friday’s representative rate, at NIS 3.4068/$. The shekel-euro rate is down 0.07%, at NIS 3.37/€.
The shekel is currently stable against sterling, at NIS 3.89/£. At 14:30 today (Israel time) the winner of the leadership contest in the Conservative Party, and hence the next prime minister of the UK, will be announced. According to the opinion polls, Boris Johnson will be replaced in the post by Foreign Secretary Liz Truss. Her rival in the election is former Chancellor of the Exchequer Rishi Sunak.
It might have been expected that a 0.75% interest rate hike at the end of August would have strengthened the shekel, but in fact since then the shekel has weakened considerably. Last week, it depreciated by 3% against the basket of currencies of Israel’s main trading partners. The answer to the riddle apparently lies in the hawkish speech by US Federal Reserve chairperson Jerome Powell at Jackson Hole a week ago. The determination he expressed in the fight against inflation led to a renewed decline on capital markets and higher expectations for US interest rates.
Leader Capital Markets analyst Yonatan Katz sees the shekel continuing to depreciate in the coming months. "It seems that the markets will continue to be nervous for the time being, as they internalize the fact that the Federal Reserve rate will rise above 4% in early 2023 and will remain at that level for some time. We assume that the shekel will continue to depreciate over the next few months. Consequently, our twelve-month inflation forecast has been revised upwards from 2.5% to 2.7%."
One important factor in the weakening of the shekel against the US dollar is the decline on US stock markets. This causes the dollar exposure of Israeli financial institutions invested in those markets to fall, which compels them to buy dollars and sell shekels on the foreign exchange market in order maintain their pre-determined exposure levels. In recent years, the shekel-dollar rate has been closely correlated with US stock indices.
Published by Globes, Israel business news - en.globes.co.il - on September 5, 2022.
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