The shekel is strengthening against the dollar and against the euro today. In afternoon inter-bank trading, the shekel-dollar rate is 1% lower at NIS 3.650/$, and the shekel-euro rate is 0.85% lower at NIS 3.958/€.
Yesterday, the Bank of Israel set the representative shekel-dollar rate down 0.54% from Friday, at NIS 3.687/$, and the representative shekel-euro rate was set 0.731% lower at NIS 3.992/€.
Mizrahi Tefahot Bank chief markets economist Ronen Menachem said this morning, "The behavior of the shekel exchange rate in recent times reflects the strong and immediate connection between it and the developments and reports surrounding the continuation of the war in general and talks regarding the hostage deal in particular. To this can be added, recently, the continued rise of the stock markets in the US, which is a traditional factor behind the strengthening of the shekel.
"Tomorrow evening the US Federal Reserve will publish the first interest rate decision of 2024 and even though by all accounts it will leave it unchanged, it is possible that it will include in its explanatory notes hints about what comes next. Against the background of estimates that the interest rate there will fall, perhaps in March, anticipation about the announcement is high and the volatility of the dollar in the world (and in particular against the euro) can certainly impact the local foreign exchange market as well.
"On the other hand, any negative development, such as the denial of any progress by one of the parties, or the imposition of harsh conditions that, according to experts, will not be accepted by the other party, may result in a depreciation of the shekel, and the longer the lack of talks would continue, the sharper the devaluation would be.
"To this should be added the difficulties reported in approval by the Knesset for the 2024 state budget including the planned 6.6% budget deficit, the concern that it will be even higher than the gap recommended by bodies like the Bank of Israel and the ratings agencies and the budget structure that will be approved by the Knesset.
All of this is taking place when economically it can be said that the shekel is still overpriced in relation to its economic value, that is, the currency is too strong given the additional factors that are supposed to affect it. Therefore, looking ahead, the strong volatility and frequent changes in direction are expected to continue. However, in the absence of a real change in the assessments of the war and the proximity on a hostage deal, there is no indication of a break in the shekel exchange rate in any direction. Of course, this estimate must be treated with caution, since the shekel has managed to weaken to NIS 4.05/$ and on the other hand strengthen to NIS 3.6/$, since the war began.
"In addition, if and to the extent that a sharp, rapid and continuous depreciation of the shekel does develop, which would be more affected by market sentiment than by economic factors, the Bank of Israel remains in the background, and may deploy, from time to time, the plan to sell dollars from its reserves. These are very high reserves of about $200 billion, which with public debt to GDP ratio, at the starting point (about 60%), constitute a supporting factor for the shekel in any global situation."
Published by Globes, Israel business news - en.globes.co.il - on January 30, 2024.
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