Last week's confirmation by Bank of Israel Governor Dr. Karnit Flug at the "Globes" Israel Business Conference that trading had been identified by speculators using algorithmic models was exceptional. The Bank of Israel has only previously acknowledged on a handful of occasions that foreign currency trading in Tel Aviv was being influenced by the activities of speculators, short term investors or others seeking to manipulate the exchange rate for financial gain. One such previous example was in the Knesset Finance Committee about a year ago when Bank of Israel market operations director Andrew Abir estimated that speculative activity in the first half of 2017 was worth about $4 billion.
On the foreign currency market today the Bank of Israel set the shekel-dollar representative rate down 0.439% from Friday's exchange rate at NIS 3.400/$ and set the shekel-euro rate up 1.308% at 4.174/€.
Last week, Flug admitted that speculators were influencing the exchange rate and compelling the Bank of Israel to intervene in trading although she used the term "traders using mathematical models." In the past few days, by the way, the Bank of Israel has stepped in to buy several hundred million dollars in foreign currency to weaken the shekel.
Niche companies such as AQR and Bluetrend are the leaders in the algo-trading sector that Flug was referring to while major global investors like George Soros or investment bank Goldman Sachs have their own algo-trading funds.
Local foreign exchange traders say that the latest wave of selling dollars and buying shekels began as soon as the exchange rate fell below the breaking point of NIS 3.50/$.
One market trader told "Globes", "We know how to identify an attack when we see it. The volume of activity by algo players in the past few days was massive. Several billion just in the past two weeks. In these volumes, one-off purchases of several hundred million dollars (by the Bank of Israel) aren't serious. In order to influence the market, you need to be buying at least $500 million per day."
Sources in the capital market point out that activity to protect the shekel exchange rate from algo traders is relatively easy because the operations of such models are influenced above all else by trends and momentums.
"You have to understand what motivates algo players. These aren't bad people and it's not some kind of conspiracy against Israel but a relatively simple investment strategy. If your rival is a hedge fund or foreign institutional body that believes in Israel and took a strategic decision to enter the market then it will be difficult to contend with. Intervention against the shekel won't be effective and will only encourage it because it will help it to buy shekels more cheaply."
"But when your rival is an algo-trader all you need do is show it that the momentum has halted. It's enough for the shekel-dollar rate to remain at NIS 3.40/$ for several days and then begin to rise for the model to retreat. The algorithm really doesn't care if it is buying dollars or selling shekels, or the opposite. It just needs to see that the momentum has changed.
Another source assisting the Bank of Israel is the fact that the current region of trading - NIS 3.39/$ - is a historic support level. Several times in recent years when the shekel reached that level, it immediately began rising.
Published by Globes [online], Israel business news - www.globes-online.com - on January 15, 2018
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