December has provided disappointing data on the Israeli currency. The shekel was the world's worst performing currency last month after the Argentinean peso and the Russian ruble, according to a survey by Meitav Dash chief economist Alex Zabezhinsky.
Zabezhinsky said, "The Israeli currency has had a high correlation over the past five years with the S&P 500 Index, but recently there has been a departure from the correlation. Together with other data, it could be that the reason is concern among foreign investors about the measures taken by the new government. But it is too early to tell where this is leading."
The shekel will begin the trading week tomorrow at just over NIS 3.50/$, after the Bank of Israel set the representative rate 0.765% higher at NIS 3.556/$ on Friday. But since then the shekel has changed direction and in futures contracts has strengthened by 0.65% against the dollar.
In December the shekel weakened by 3% against the dollar and overall in 2022 the Israeli currency weakened by 13% against the dollar. The shekel weakened by 6% against the euro in 2022 and on Friday the representative shekel-euro rate was set 0.224% lower at NIS 3.736/€.
Zabeshinsky adds that not only has the shekel weakened significantly against the US dollar recently, but Israel government dollar bond margins have widened relative to equivalent US government bonds. The spread for Israeli government dollar bonds maturing within 8 years increased in relation to their equivalents, from 0.45% to about 0.65%.
Meitav also notes that weakness is being felt in other Israeli investment channels, such as the Tel Aviv Stock Exchange (TASE), which underperformed in December compared with stock markets overseas. Over the last month, the TA 125 index (not including today's rise) fell by 2.4%, while the S&P500 Index fell by about 1%, and the MSCI World Index rose by 0.2%.
Zabeshinsky also points out that Israel's risk premium (CDS) has increased over the past month by about 6 basis points. He adds, "This is unlike the case of most countries, where the risk premium generally fell. Among the countries with a risk premium similar to that of Israel, the increase in the risk premium in Israel was the strongest."
On Friday there was a rally in Wall Street stocks, including the Nasdaq index. As the upward trend in stocks continues, the question arises whether we will see a return of the strong shekel. Zabeshinsky says, "It is indeed likely that we will see a strengthening of the shekel. But there may be other factors that have been affecting the shekel-dollar exchange rate recently. For example, foreign institutions that sell a few shekels or local institutions that want to change their exposure. So we shall have to see whether there will be a continuation of the shekel's disconnect from the S&P500 Index."
Published by Globes, Israel business news - en.globes.co.il - on January 8, 2023.
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