"We have identified operations by players that aren't actually linked to real operations and these are traders with models and we have intervened within this context." This statement from Governor of the Bank of Israel at the "Globes" Israel Business Conference last week was unusual. Only in a few instances in the past has the Bank of Israel confirmed that foreign exchange trading was affected by the activity of short-term traders, speculators, or parties seeking to manipulate the exchange rate to make a profit. Just such a rare admission was recorded a year ago in the Knesset Finance Committee when the director central bank's Market Operations Department, Andrew Abir, estimated speculative activity in the shekel in the first half of 2017 at $4 billion.
In her remarks last week, the Governor of the Bank of Israel confirmed in real time that speculative activity was affecting the exchange rate and forcing the bank to intervene in trading, except that she refrained from calling the players involved speculators. The extent of the bank's intervention will be made public only in retrospect, but it is estimated that on one recent trading day it bought hundreds of millions of dollars.
The players that Flug talked about are known on the market mainly as algorithm, or algo, funds. Until a few years ago, this was a field for niche players such as AQR and BlueTrend, but it has now become much broader, and any large global investor, like George Soros or investment bank Goldman Sachs, has an algo fund in their arsenal.
The word on the foreign exchange market is that the current wave of dollar selling started the moment the shekel-dollar rate fell below NIS 3.50/$. "We know an attack when we see one," market players told "Globes". "The scope of the algo players in the past few days has been huge," they say, "billions just in the past two weeks. With amounts like these, a one-time purchase of a few hundred million dollars wasn't serious. To have an impact on the market, you have to intervene at a rate of $500 million a day."
Capital market sources point out that protecting the shekel exchange rate from the activity of computer model-driven players is actually fairly easy, because the models with which these players work are affected more than anything by the trend or momentum. "You need to understand what motivates the algo players. These are not bad people and it's not some kind of conspiracy against Israel, but a fairly simple investment strategy. If your opponent is a foreign hedge fund or financial institution that believes in Israel and makes a strategic decision to enter the market, you'll find it hard to counter him. Intervention in shekel trading will not be effective, and will only encourage him, because it will help him buy shekels more cheaply.
"But if your opponent is an algo fund, all you have to do is to demonstrate that the momentum has stopped. It's enough for the shekel-dollar rate to stay at, say, NIS 3.40 for a few days and then start to rise for the model to reverse direction. It really makes no difference to the algo player if he buys dollars and sells shekels, or the other way around. All he needs is to see that the momentum has changed."
Another factor in the Bank of Israel's favor is the fact that the region in which the shekel-dollar rate now finds itself - NIS 3.39/$ - is a historical support level. At least twice in recent years the exchange rate fell to this level and immediately started to climb back.
Published by Globes [online], Israel business news - www.globes-online.com - on January 16, 2018
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