While many headlines warn that capital and foreign investors are abandoning the country, the Israeli currency has actually been strengthening in recent weeks. Yesterday, the Bank of Israel set the representative shekel-dollar rate down 0.089% from Tuesday, at NIS 3.370/$, although in early afternoon inter-bank trading the shekel is weakening 0.46% against the dollar at NIS 3.386/$. After weakening in December, the shekel has gained 4.8% against the dollar since the start of 2023, and is trading at levels not seen since August 2022.
The experts attribute this mainly to the weakness of the dollar on world markets and to global macroeconomic conditions. Another factor is connected to the stock market with the Nasdaq up 9% since the start of the year and any wind in the sails of tech investors is an encouragement for the shekel.
The pressure from a US recession
Bank Hapoalim chief financial markets strategist Modi Shafrir says, "We see the strengthening of the shekel against the dollar stemming mainly from the recovery of the Nasdaq index. When the index rises, institutional bodies in Israel sell dollars because they need to reduce their dollar exposure. The situation is of course reversed when the Nasdaq index falls. Generally, the dollar on world markets has been weakening in recent weeks. This can be seen in the shekel-euro exchange rate, which has not changed sharply in contrast to what is happening against the dollar."
He adds, "Generally, the shekel has strengthened 3% against the basket of major currencies since the start of 2023, after the shekel weakened 3.3% against the basket in December. So we are also talking about a correction of the shekel with other currencies, after showing weakness in December.
"On world markets, the dollar has weakened significantly and has fallen from its peak. This stems from the closing of positions opened by speculators. There are also estimates that the US will enter a recession and in line with this, priced in are interest rate cuts from the second half of the year.
"Since China's economy is opening up these days, there is more optimism about the economy in Europe and about emerging markets in general. Now, we tend to estimate that the economically weakest point in the world will be mainly in the US. So after the dollar strengthened a lot in the world last year, it has weakened a lot now."
He also adds, "In Israel from a macroeconomic point of view, it can be noted that investments in high-tech are moderating, but there are also data that support the strong shekel. Basic factors support a strong shekel in the long term, this is on the assumption that nothing extreme will happen."
Unique strengthening of the shekel
Bank Leumi head of markets strategy Kobby Levi thinks that the strengthening of the shekel has only just begun. He says, "First of all as a result of the devaluation of the dollar. We also see that the US currency strengthens in the world 'when everything is bad' or 'when everything is good' in the US economy. Today we can say that the economic situation in the US is 'okay', but on the other hand in the rest of the world the economic situation is improving at a faster rate.
"Among other things, there is the re-opening of China, the drop in energy prices, the moderation in the rise in inflation. There is also the possibility of the publication of better-than-expected macroeconomic data in the coming period. All these factors are mainly what supported the depreciation of the dollar against other major currencies in recent weeks."
Levi continues. "Over the past week, we have seen a further strengthening of the shekel, which is more local and unique to the Israeli currency. It is also reflected against the euro and the pound sterling. I attribute it mainly to the effect of the strengthening of stocks in the US. We saw the S&P500 break through the 4,000 point threshold, and that means something."
"However," adds Levy, "despite the recent strengthening, it is still not dramatic in terms of the shekel-dollar exchange rate. Among the basic economic forces of the economy, the current account surplus that resulted mainly from high-tech will weaken from this side, but in our estimation in the next year or two it will be supported by natural gas, and also an increase in demand for defense products. Just this week it was announced that Germany will supply equipment to the Ukrainian army. We see more countries that are procuring energy for themselves in the understanding that they need to be ready for a rainy day."
And where is the shekel-dollar rate headed? Levi says, "Our forecast is for an average rate in 2023 that will between NIS 3.4 and 3.6/$. The expectation is that towards the end of the year we will see the rate even lower. There will be a moderate strengthening of the shekel against the dollar throughout the period as a result of the devaluation of the dollar in the world and out of the expectation that the basic forces in Israel will play a role.
"Nevertheless, there is also a lot of uncertainty, mainly from the contrast between the scenario that the US Federal Reserve was preparing for (high interest rates for a long time). The Fed expects a soft landing for the economy while the market expects a recession that will lead to a reduction in interest rates. This gap is fertile ground for volatility, and adjustments to reality can be significant."
Published by Globes, Israel business news - en.globes.co.il - on January 26, 2023.
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