The shekel is again depreciating today and is at its weakest exchange rate against the dollar since July. In afternoon inter-bank trading, the shekel exchange rate is up 0.85% against the dollar at NIS 3.445/$ and is up 0.32% against the euro at NIS 3.402/€.
Yesterday, the Bank of Israel set the representative shekel-dollar rate up 0.029% from Monday, at NIS 3.416/$, and the representative shekel-euro rate was set 0.186% higher at NIS 3.394/€.
The main reason for the depreciation of the shekel, according to analysts, is the negative trend on Wall Street. Bank Hapoalim chief financial markets strategist Modi Shafrir said, "If we look at the shekel against the dollar, it looks like the trend is downwards but against the basket of major currencies, the shekel is still very strong."
The Nasdaq index has a substantial impact on the shekel exchange rate for two reasons, Shafrir explains, the first of which is the institutional investors in Israel. "When the markets rise institutional investors that are exposed to overseas markets mainly sell dollars. We don't yet have data for July and August but in 2021 they sold $24 billion and strengthened the shekel. When the markets fall, as is happening now, they buy dollars. The institutional investors are exposed to overseas markets through contracts and by buying dollars they increase their collateral."
Shafrir also stresses that the dollar, as always, is considered secure and represents a safe haven when markets are falling. The US dollar is currently at a 20 year high against the index of the world's major currencies due to the energy crisis and concerns about a recession in Europe, as well as the widening interest rate gap between the US and the euro zone, Shafrir explains.
Another reason put forward by Shafrir for the trend of the last few weeks is the relative lack of dollars in the local market. "It's not that there is a lack of dollars in cash," he emphasizes, "but that sometimes during periods of sharp declines in the markets it is more difficult for the institutional bodies to borrow dollars and they are forced to buy them, which further strengthens the American currency against the shekel."
Psagot chief strategist Ori Greenfeld also points out that one of the reasons for the weakening of the shekel is in the interest rate gap with the US and revised investors' forecasts. "Investors today estimate that the interest rate in the US will rise to a higher level than they expected and that it will remain high, so the interest rate gap will increase even more, and this works in favor of the dollar. That's why the dollar is strengthening against all currencies in the world."
"We believe that interest rates in the US will reach 4%-4.25%, and this is not yet reflected in the market, so there is still room for the dollar to strengthen. If the Fed does raise the interest rate towards 4-4.25%, the stock market is expected to return to a positive trend and then the shekel will also strengthen again, as it has in recent years."
The main question, says Greenfeld, is how the European Central Bank (ECB) will react - and it is caught between a rock and a hard place. "On the one hand, it seems that Europe is on the way to a severe recession, and on the other hand, inflation is boiling over there. The bank will have to decide whether to fight inflation even at the cost of a severe recession or not. We estimate that interest rates in Europe will not rise at a rate similar to that of the US, and the result will be a greater gap between the interest rates so that the dollar will continue to strengthen against the euro. The big question mark is the ECB's policy and any attempt to answer it is a gamble."
Greenfeld conveys optimism and estimates that the markets will rise again, and thus the shekel will resume strengthening against the US currency. He also notes that Israel has more certainty compared with Europe. "In terms of foreign trade, export-import, we are starting to see the slowdown in the tech sector, but ultimately it is a correction of the madness of 2020-2021. It is not that the tech sector will suffer for a long time, and we estimate that for the shekel, this is good news. We are optimistic."
The Bank of Israel's interest rate has become only a secondary factor
Psagot estimates that the Bank of Israel will continue to raise the interest rate up to 3.25%-3.5% and then inflation will also cool down, but questions whether the interest rate is still a central and strong parameter in determining the exchange rate.
Meitav chief economist Alex Zabezhinsky explains that the interest rate is now only a secondary factor in the shekel-dollar exchange rate, and like Shafrir believes that Israeli institutional investors set the tone.
"It's quite simple. The shekel-dollar exchange rate has been highly correlated in recent years with respect to the US stock market. If the stocks in the US rise, the shekel strengthens. If they decrease, the shekel weakens. The reason for this equation is the portfolio of the institutions abroad which is very large, and this correlation is only getting stronger. The devaluation we have seen recently started when the downward trend began in the US. If you want to understand where the exchange rate is going, you have to try to understand where the stock market is going. The Bank of Israel's interest rate used to be the most important and powerful parameter, and now it is only a secondary variable," explains Zabezhinsky.
Published by Globes, Israel business news - en.globes.co.il - on September 7, 2022.
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