This week’s trading on the foreign exchange market has opened with a further weakening of the shekel against the major currencies. The shekel-US dollar exchange rate is currently up 0.55% in comparison with Friday’s representative rate, at NIS 3.8279/$, and the shekel-euro rate is up 1.99%, at NIS 4.1932/€.
Last week’s trading demonstrated once more how sensitive the financial markets, including the foreign exchange market, are to geopolitical developments. The shekel weakened by about 2% last week against the US dollar, with the representative rates set on Friday at NIS 3.8070/$ and NIS 4.1114/€.
The effect of the fear of escalation in Israel’s conflict with Hezbollah in Lebanon and with Iran was evident on the Tel Aviv Stock Exchange yesterday, as the Tel Aviv 35 Index fell 2.5% and the Tel Aviv 90 Index fell 1.8%. Indices of technology shares fell by about 4%. So far this morning, the Tel Aviv 35 Index is down 2.18% and the BlueTech Global Index is down 3.23%
The weakness of the shekel against the US dollar comes despite the weakness of the dollar itself on world markets. In the past month, the euro has strengthened against the dollar by about 1%.
"Geopolitics is stronger than fluctuations in the dollar on world markets," risk management specialist Shmuel Berger told "Globes", explaining why the weakness of the dollar will not lead to appreciation of the shekel. "If an attack takes place by Iran and its proxies that causes heavy damage, we are likely to see regional escalation, in which case the shekel-dollar rate could reach NIS 3.9/$ or higher," Berger says.
In that event, Berger explains, Israeli financial institutions will have to change their investment portfolios in accordance with their exposure to the dollar. "That will reinforce the depreciation of the shekel, and strengthen foreign investors, the speculators who operate in the foreign exchange market and move the currency exchange rate in accordance with security events."
High volatility
In Berger’s view, in an extreme scenario, the shekel-dollar rate will even reach NIS 4/$. On a more optimistic scenario, however, in which the response of Iran and Hezbollah to recent killings of senior figures in Hamas and Hezbollah is muted and the region calms down, Berger estimates that the shekel will appreciate slightly, and that the shekel-dollar rate will fall below NIS 3.8/$.
IBI Investment House chief economist Rafi Gozlan says, "The rise in Israel’s risk premium is manifest in all instruments and of course in the foreign exchange market as well. Two weeks ago, market sentiment was going the other way, with an expectation that things would calm down and that there might even be a hostage release deal, but we now have a 180 degree turnabout." Nevertheless, Gozlan estimates that the impact of the investment portfolios of the financial institutions is relatively low, and that we will not see a sharp depreciation of the shekel,
Will the Bank of Israel intervene?
Gozlan believes that if the depreciation of the shekel reaches a certain point, the Bank of Israel will be obliged to intervene. "The bank is not intervening at the shekel’s current levels, but market players know that it will intervene at high rates - over NIS 4/$."
Under the plan presented by the Bank of Israel at the beginning of the war, $30 billion were allocated for sale, with the aim of stabilizing the foreign exchange market. So far, the bank has sold only $8.5 billion.
Gozlan adds that the rapidity of the depreciation will also affect the response of the Bank of Israel. "If the shekel slides quickly, the Bank of Israel will see that as a market malfunction, and will intervene."
Published by Globes, Israel business news - en.globes.co.il - on August 5, 2024.
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