The Bank of Israel Monetary Committee's announcement on Thursday that it would buy $30 billion in foreign currency in 2021 was a marvelous piece of magic. It did the trick, working immediate wonders, as the shekel-dollar exchange rate, which had been set at NIS 3.116/$ just before the announcement was released, rose 3.691% to be set on Friday at 3.231/$. In futures, the shekel weakened a further 1.6% against the dollar over the weekend. The Israeli currency has depreciated by a similar percentage against all the world's major currencies.
It remains to be seen over the next few days whether the effect will fade and the shekel will immediately rebound. To put matters into perspective the shekel has been pushed back to its exchange rate on the dollar in the first week of December, when it was on the verge of moving from its strongest in 12 years to its strongest in 24 years.
Whoever thought of the idea of announcing the foreign exchange purchases in advance is a genius - but a PR genius rather than a macroeconomic one. Normally the Bank of Israel has to actually buy dollars in order to impact the exchange rate. In a stroke, and without buying a single dollar, the Bank of Israel was able to wipe nearly 5% off the value of the Israeli currency.
The Bank of Israel has successfully ended the run on buying shekels and bought Israeli exporters a bit more time to adapt to the ever-strengthening shekel, but when the dust settles the economic forces that have been strengthening the shekel will remain the same.
Israel's current account surplus and the country's tech exports will likely continue to grow along with direct overseas investment in Israel. If the stock exchange in the US continues to rise Israel's institutional investors will need to buy more shekels to hedge their investments. The only likely change is that borders will eventually reopen and Israelis will once again be able to vacation abroad, spending even more on overseas shopping as their shekel goes further than ever in foreign stores.
Nor is the Bank of Israel's $30 billion announcement that much of a 'game changer.' When Governor Prof. Amir Yaron assumed office in December 2018, he was viewed as a hawk that would end the policy of his predecessors of building up foreign exchange reserves through market intervention to weaken the shekel.
In his first months in office the purchase of foreign currency was halted but that changed as the shekel continued to strengthen and in the six months before the start of the Covid-19 pandemic the Bank of Israel purchased $11 billion in foreign currency. In 2020 overall, the Bank of Israel purchased over $21 billion in foreign currency and between February and April there were no foreign currency purchases as the Covid-19 saw investors running for the save have dollar, hugely weakening the shekel anyway.
So buying $30 billion in 2021 is not so much a 'game changer' or new policy but simply doubling down on existing policy. Of course there is no guarantee the Bank of Israel will actually buy $30 billion this year. Deputy Governor Andrew Abir confidently told journalists "Let there be no uncertainty, we will buy the entire $30 billion in 2021."
Despite these assurances the Bank of Israel would be unlikely to implement the policy if, for example, conflict with Iran or the Palestinians were to erupt. 2021 is fraught with uncertainty despite Abir's attempts to banish it. 12 months ago who would have predicted Covid-19 and lockdowns, direct flights from Tel Aviv over Saudi Arabia to Dubai and right-wing rebels storming the US Capitol in an attempt to overturn the election results. Only a fourth Israeli election in two years and the country's chronic political uncertainty were probably a certainty.
But even if 2021 provides no big surprises and the Bank of Israel does indeed buy its $30 billion, with the strength of Israel's tech sector, the success of the country's vaccination drive and the new markets opened up by the Abraham Accords, it would surely be a major surprise if the Israeli currency ends 2021 weaker than it started the year.
Published by Globes, Israel business news - en.globes.co.il - on January 17, 2021
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