Five reasons why the shekel is weakening

Shekels Credit: Shutterstock Vladerina32

Mizrahi-Tefahot Bank chief economist Ronen Menachem explains the factors causing the shekel to weaken and says he expects the depreciation to continue.

The stock market is quiet during the Passover holiday but the foreign currency market is stormy, with the shekel weakening sharply in inter-bank trading. The shekel-dollar exchange rate is up 1.28% at 3.24/$ and up 0.19% against the euro at NIS 3.498/€. Since the start of 2022, the shekel has lost 3.6% against the dollar, although the Israeli currency is still 2.2% stronger against the dollar than it was one year ago.

Mizrahi-Tefahot Bank chief economist Ronen Menachem said the weakening of the shekel was possibly due to five factors. "It could be a response to the Consumer Price Index (CPI) for March, which was a little lower than expectations and this could moderate the rate hikes planned by the Bank of Israel. The Bank of Israel put the interest rate up to 0.35% and it could be that the next hike will be lower than planned - for example 0.15%, and that could work to weaken the shekel."

The March CPI rose 0.6%, the Central Bureau of Statistics reported on Friday, while analysts had predicted a rise of 0.8%. Inflation in Israel over the past 12 months is 3.5%, the same figure as last month, although still above the Bank of Israel's annual target range for inflation of 1%-3%, for the third consecutive month. The Bank of Israel last week revised its inflation forecast for 2022 upwards to 3.6% from 2%.

A second reason for the depreciating shekel, according to Menachem, is the strengthening of the dollar on world markets. "We are seeing the war between Russia and Ukraine continuing and there are no signs of a ceasefire, on the contrary, there are negative developments. Currently, and for the near future the dollar will be a safe haven that everybody wants to buy, with its strengthening worldwide causing it to strengthen in Israel."

The third reason for the weakening of the shekel provided by Menachem is that past experience has shown that during the holidays, when trading levels are relatively low, volatility is higher and that can be reflected in the volatility of the shekel.

An additional factor causing the depreciation of the shekel, according to Menachem, is the security tensions of the past few weeks, including the current rioting on the Temple Mount in Jerusalem and incidents in other parts of the country. "It is a tense time and during such periods the shekel tends for short periods to respond by weakening - and that is what we are currently seeing.

Alongside the security tensions, the political uncertainty in Israel is the fifth and final reason, according to Menachem, why the shekel is losing ground. Ra'am, United Arab List has suspended its participation in the government coalition, due to the security tensions, raising concerns that after the Passover recess, the Knesset will vote to disperse and there will be new elections. "This is not good news for the capital market, which prefers stability and continuity," Menachem observes. He stresses that only last week Moody's upgrade Israel's rating outlook to "Positive," thanks to Israel's strong fiscal performance and the robustness of its economy but the conditions for the rating remaining unchanged is fiscal stability and continued investments in infrastructures.

"As soon as there are concerns that this will end and we will return again to elections and the expenditure and budgets entailed, and the end to government and the inability to implement government plans that the market is interested in, that works to the detriment of the shekel and the economy and can harm the future readiness of the ratings agencies to continue to recommend the economy, so that the political uncertainty also works to weaken the shekel."

Menachem concluded, "These explanations testify to the continued depreciation of the shekel in the near future, as long as all these circumstances or at least some of them continue to prevail."

Published by Globes, Israel business news - en.globes.co.il - on April 18, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.

Shekels Credit: Shutterstock Vladerina32
Shekels Credit: Shutterstock Vladerina32
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