The shekel weakened sharply against the US dollar and the basket of currencies in December. It weakened against the currencies of all the countries, and particularly against the dollar and the euro. According to Bank Leumi analysts, what happens to the shekel going forward will depend mainly on the volatility of world stock markets.
"The change in the shekel-dollar exchange rate took place in close connection with the average change in the main stock indices," explains Kobby Levi, head of markets strategy at Bank Leumi. "In the early part of 2023, stock markets will continue to be volatile, among other things because of the gap between market expectations of interest rate developments and the plans of the US Federal Reserve to keep interest rates high for the entire year.
"The process of bridging this gap is liable to lead to volatility in the values of various financial assets, and in the value of the dollar," Levi adds.
Bank Leumi believes that the Federal Reserve will determinedly continue monetary tightening until the 2% inflation target is reached in the US, "even at the price of economic damage", and estimates that the implementation of the Federal Reserve’s plans will support the dollar, and at the same time could weigh on the stock market, on dollar-denominated bonds, and also on the shekel, until the gap between market expectations and Federal Reserve policy is bridged.
If the volatility in stocks does continue for the first few months of 2023, Levi estimates that the trading in the shekel will continue to be correlated with changes in US stock indices and "will depreciate in line with the falls". Once the stock markets stabilize and even start rising again, the shekel too can be expected to stabilize, and start strengthening. "It may be that this change of trend will take place even before the end of the economic slowdown, since financial markets look to the future."
Another factor that could explain the recent depreciation of the shekel, according to Leumi, is the large purchases of foreign currency by financial institutions in October and November. The result of the recent election in Israel, incidentally, has had a negligible effect on the shekel exchange rate, according to Leumi.
The economics department of Bank Leumi’s Capital Markets Division forecasts that the average shekel-dollar exchange rate over the next twelve months will be in the range of NIS 3.45-3.65/$, and that the trend will be moderate appreciation of the shekel, mainly in the second half of the year.
Published by Globes, Israel business news - en.globes.co.il - on January 11, 2023.
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