Since the start of the week, the shekel has strengthened by 0.75% against the US dollar and despite weakening 0.47% so far today to NIS 6.522/$, it is over 5% stronger against the dollar than on the eve of the war in early October. The strengthening of the shekel comes after the Israeli currency weakened considerably in the early part of January due to an escalation in the security situation. Israel Discount Bank market strategist Shmuel Katzavian says that providing the security situation improves, the strengthening of the shekel so far is just the start.
He says, "We see the shekel strengthening against the dollar to NIS 3.28-3.58/$ by the end of the year, although it should be remembered that the volatility will be high and on the way there 'anything is possible." He explains that the wide target range stems from different circumstances due to uncertain factors in markets.
Katzavian lists several factors behind the predicted strengthening of the shekel, the first of which is the starting point of the Israeli currency: "According to our model, which evaluates the value of each currency according to the level of the relative shopping basket in each country, we see a significant gap of about 10% between the shekel-dollar level today and the level derived from this model." According to the model comparison, the shekel is trading at a level that is too low for what we would expect. Katzavian states that the gap indicates a general pressure for the shekel to strengthen in a situation where looking ahead the risk premium will ease.
In addition to this model, Discount estimates that global stock markets will continue to rise. A rise in overseas stock markets supports the shekel as institutional bodies sell foreign currency. The exposure of these bodies to foreign currency has very much grown over the past year, and consequently a further rise in share prices worldwide would increase exposure even more - a situation that the institutions are trying to avoid at this stage.
Katzavian adds that in his estimation by the end of 2024 there will be an easing or at least a decline in Israel's risk premium. However, he qualifies this by saying, "It is important to remember that 2024 will also be volatile due to geopolitical factors. There is uncertainty about a number of risk factors in the short term such as the message from the US Federal Reserve and European Central Bank, Israel's credit rating with Moody's and the war situation in the south, the north and on other fronts.
Discount Bank sums up that these factors will affect the shekel until the end of 2024 unless the most extreme scenarios are realized.
Published by Globes, Israel business news - en.globes.co.il - on February 1, 2024.
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