Even during these uncertain times the shekel is maintaining its strength against the world's major currencies. In morning inter-bank trading the shekel - dollar exchange rate is down 0.41% at NIS 3.577/$ and the shekel - euro rate is down 0.05% at NIS 3.724/€.
Yesterday, the Bank of Israel set the representative shekel-dollar rate up 0.111% from Tuesday, at NIS 3.592/$, and the representative shekel-euro rate was set 0.635% higher at NIS 3.726/€.
Bank Leumi head of markets strategy Kobby Levi tells "Globes," that since the ceasefire on Israel's various fronts there has been an improvement in business and financial activity in Israel, which has also been expressed by the strengthening of the shekel against the basket of major currencies. The picture in the foreign exchange market, and the market data showing the possibility of further appreciation of the shekel, raise the question of whether portfolio owners with high exposure to foreign exchange have a reason to hedge their investment portfolio.
Whether you invest in stocks on Wall Street or in European indices - you are exposed to changes in currency rates. When the shekel strengthens against the dollar, the value of your investment in shekels decreases, and vice versa - when it weakens, the investment is worth more. For the Israeli investor, trading in other world currencies is a derivative of the shekel against the dollar. Fluctuations in the currency market are the reason investors use financial instruments to hedge exposure to foreign exchange, in order to protect their portfolio.
Every investor should prepare for possible scenarios
Following the significant improvement that is already largely reflected in the prices of financial assets and given the great uncertainty in the local and global geopolitical context, there may be a number of possible developments that could affect investors' decisions.
In Levi's assessment, every investor should assess which of the possible scenarios will materialize. "The options can be divided into three main scenarios: central, optimistic, and pessimistic. In the central scenario, in which it appears that the ceasefire continues, and the positive sentiment is maintained, Israel's credit rating and fiscal situation will remain stable, the state budget will be approved in accordance with the plan approved in first reading, the Bank of Israel interest rate will decrease once or twice during the coming year, and no bad things will happen in terms of security.
"The estimates are that the average exchange rate of the dollar against the shekel in the coming year will be in the range of NIS3.45-3.65/$. This is while the shekel will gradually strengthen and may even reach a rate of NIS 3.4/$ towards the end of the year." Taking into account the cost of hedging foreign exchange exposures (which currently stands at a cost of about 1% in the coming year), Levi explains that "for investors who estimate that this scenario will materialize, the recommendation is to hedge foreign exchange exposures at rates above NIS3.60/$."
The central scenario has optimistic and a pessimistic variations. In the pessimistic scenario, which sees a deterioration in the security situation, the collapse of one or more of the ceasefire agreements and a return to intense fighting, with threats from additional countries in the Middle East, the exchange rate will rise and may reach a level of NIS 3.70-3.80/$. Another risk factor that may lead to the depreciation of the shekel is sharp declines in global stock markets. According to past experience, during declines in global stock markets, the shekel weakens.
Levy says, "According to various indications, we estimate that this relationship will continue in the event of declines in global stock markets. Therefore, for investors who believe these pessimistic scenarios will be realized, it is not appropriate to hedge foreign exchange exposures at current exchange rates of around NIS 3.55-3.60/$."
"There is justification in simultaneous exposure to other foreign currencies"
Finally, the optimistic scenario should also be considered. In Levi's assessment, the probability of its realization is reasonable. In the event of faster-than-expected growth in business activity in Israel, or in the event that significant progress is made in the normalization agreement with Saudi Arabia, the shekel will appreciate sharply. "In such a scenario, the improvement in the fundamentals of the current account surplus and capital flows will be sharp and rapid, and the shekel is expected to strengthen towards the NIS 3.40/$ level or even below that."
His recommendation for investors who estimate that this scenario will materialize is to hedge foreign exchange exposures at the current rates of NIS 3.55-3.60/$.
Levi points out that these scenarios focus mainly on exposure to the US dollar, when the dollar was and is expected to continue to be a strong currency. But in his opinion, things should be looked at from a broader perspective. "The shekel is strong at historical levels against the euro and against sterling - currencies that have performed less well than the dollar, each for its own reason. "In our assessment, the likelihood that this trend will continue is high, and therefore for investors who choose to hedge their exposures against the dollar, there is great justification for simultaneously hedging exposures to these currencies."
Full disclosure: Question of the Week is a "Globes" editorial project carried out in collaboration with Bank Leumi experts. The above should not be considered a recommendation or a substitute for the reader's independent judgment, or an invitation to make any purchases or investments and/or actions or transactions. It does not constitute a substitute for personal investment advice that takes into account the needs and data of each individual.
Published by Globes, Israel business news - en.globes.co.il - on February 13, 2025.
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