The volatility in Israel's foreign currency market has persisted for some months now and sharp changes in the representative rate of the shekel have become routine. Just yesterday the Bank of Israel set the representative shekel-dollar rate 1.127% higher from Tuesday, at NIS 3.679/$, and the representative shekel-euro rate was set 1.233% higher at NIS 4.031/€.
In the past three months, the shekel had depreciated 2.3% against the US dollar and 3% against the euro. However, when checking the movement of the shekel against the basket of major currencies that comprise the nominal exchange rate, the shekel has only depreciated slightly over the past three months and has even strengthened over the past month.
This trend is explained mainly by the sharp depreciation of the Turkisah lira and Chinese yuan, which together contribute 15.2% to the nominal exchange rate.
The connection to the Turkish lira
The depreciation of the Turkish lira is a process that has been ongoing for several years. Against the US dollar, the Turkish currency fell 44% in 2021, 30% in 2022 and has depreciated 39% since the start of 2023. Less than a month ago President Recep Tayyip Erdogan was re-elected for a third term and this saw the lira fall by more than 15%.
At the same time, the Turkish central bank raised the interest rate from 8.5% to 15% due to inflation, which last October reached a record annual rate of 85.5%. After the latest rate hike, the Turkish lira depreciated 2% against the US dollar.
Regarding the yuan, China's weak growth data and disappointing stock market performances have weighed on the Chinese currency.
Mizrahi Tefahot chief markets economist Ronen Menachem explains, "Examining the nominal exchange rate over the past three months shows that the shekel has depreciated by only 0.5%. Moreover, since the beginning of the month the shekel has strengthened 3.5% against the basket of currencies. How has this happened? Compared with the dollar and euro, the shekel has weakened over the last three months (by 2.3% and 3%, respectively), and strengthened since the beginning of the month (2.9% and 1.3%).
"However, against the Chinese yuan, the shekel strengthened by 2.6% in the last three months and by 4.2% since the beginning of the month. As mentioned, the yuan makes up 11.5% of the nominal rate - a significant weight. More noticeably, the Turkish lira has weakened against the shekel by 33% in the last three months and 27% since the beginning of the month alone! According to its 3.7% weight in the nominal rate, it has contributed a full percentage to the strengthening of the shekel against the basket during this period."
Psagot chief strategist Ori Greenfeld adds, "The difference in the performance of the shekel against the euro and the dollar and against the basket of major currencies is mainly related to the weakening of the Chinese yuan and the Turkish lira, which together make up about 15% of the composition of the currency basket. The Turkish lira has suffered from a sharp devaluation of the currency in recent years, which recently deepened following the sharp increase in interest rates in the country. The Chinese yuan also weakened against the dollar due to the weakness in the economic data presented by China as well as the government's decision on monetary expansion which also contributed to the weakness of the currency.
IBI chief economist Rafi Gozlan says, "In the second quarter, the shekel exchange rate continued to be characterized by high volatility, mainly due to the influence of developments on the judicial-political issue. Thus, after a lull in the first half of June, it weakened again in recent days due to fear of renewing legislative initiatives to weaken the judicial system, and also due to the fear of harming the independence of the Bank of Israel and the question marks around the continuation of the governor's term.
"Thus the increase in the economy's risk premium is reflected in the renewed weakening against the dollar and the euro. On the other hand, the changes in the shekel nominal exchange rate in the last month and quarter are more moderate than against the euro and the dollar, and this is due to the weakening of the Chinese yuan and the sharp depreciation of the Turkish lira, which together make up about 15% of the currency basket."
Published by Globes, Israel business news - en.globes.co.il - on June 29, 2023.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.