BoI buys foreign currency to halt shekel appreciation

Dr. Nadine Baudot-Trajtenberg
Dr. Nadine Baudot-Trajtenberg

Bank of Israel Deputy Governor Dr. Nadine Baudot-Trajtenberg told "Reuters" that the shekel is overvalued.

The Bank of Israel today began buying dollars to halt the shekel appreciation against foreign currencies. Purchases apparently amounted to hundreds of millions of dollars.

Currency speculation that has been pushing down the shekel exchange rate against foreign currencies continued earlier today, despite the Bank of Israel's signaling the market that it would take strong action if the trend continued.

Comments today by Bank of Israel Deputy Governor Dr. Nadine Baudot-Trajtenberg followed criticism of the Bank of Israel's failure to take action against shekel appreciation that followed the publication of the fourth quarter growth figures.

"The Bank of Israel possesses the tools to be the strongest and most sophisticated player in the foreign currency market, but it is not using them effectively," market players told "Globes." They asserted that the Bank of Israel's anemic statements in its most recent interest rate announcement published on Monday reinforced the market's feeling that the Bank of Israel did not intend to act with determination to halt currency speculation.

Baudot-Trajtenberg told Reuters today, "The shekel is over-valued and that has become more strongly so in the past few months… We think fundamentals point to a weaker shekel." The shekel-euro exchange rate is at a 15-year low, while the shekel-dollar exchange rate is at its lowest point since October 2014.

"Foreign exchange intervention is very much on the table and we will continue to use it if we think the exchange rate will depress the economy ... We feel intervention is effective," Baudot-Trajtenberg said, citing a monetary policy report published last week by the Bank of Israel, which claimed that the purchase of $100 million caused a 0.6% average increase in the shekel exchange rate in 2016.

Bank of Israel sources told Reuters that the bank had purchased hundreds of millions of dollars in February, on top of $50 million in January and $2.6 billion in the second half of 2016. The Bank of Israel's foreign currency reserves recently exceeded $100 billion.

The foreign currency market called Baudot-Trajtenberg's remarks "a step in the right direction," but the shekel continued to strengthen today against the dollar and the euro despite her statement, and the trend became steeper after her remarks were published.

Foreign banks, funds, and other investment concerns are behind the wave of shekel purchases. Almost all the foreign banks active in Israel have recently recommended selling dollars at a NIS 3.70/$ exchange rate. Forex market players cited the recently growth figures published by the Central Bureau of Statistics as a factor in the shekel speculation.

The fourth quarter growth estimate published by the Central Bureau of Statistics two weeks ago was 6.2%. Investors took particular note of a 4.5% rise in exports of goods and services, a figure interpreted by the markets that the Bank of Israel would be less concerned about damage caused to exports as a result of shekel appreciation, and would reduce its activity aimed at preventing further shekel appreciation. "We are seeing nice growth but we are not seeing a real step-up in the growth of the economy," Baudot-Trajtenberg said, adding that by growth per capita "the economy in Israel is doing OK, but it is not much better than our trading partners," adding, "…inflation has not given us reason for putting brakes on the economy."

In its announcement of the Monetary Committee's decision to leave the interest rate at its current level, the Bank of Israel did not cite its concern about the recent shekel appreciation. The Bank of Israel's Research Department's interest rate forecast was unchanged; it expects an interest rate hike of 15 base points by the end of 2017, and a further increase of 25 base points in 2018.

Published by Globes [online], Israel Business News - - on March 1, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

Dr. Nadine Baudot-Trajtenberg
Dr. Nadine Baudot-Trajtenberg
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