Foreign speculators behind strengthening of shekel

Amiram Barkat

In Israel, publication of the Bank of Israel protocols on the interest rate decision did not make waves, but the rest of the world attributed far more importance to them.

Are foreign speculators behind the recent strengthening of the shekel against foreign currencies? Only the Bank of Israel possesses the professional tools to answer this question. In similar events in the past, former Governor the Bank of Israel Karnit Flug and other senior Bank of Israel executives blamed "short-term players" for sharp fluctuations in the shekel exchange rate.

We may soon hear the Bank of Israel mention the recent appreciation of the shekel. Until then, it appears that it will not be too risky to say that there is a high degree of certainty that "if it walks like a speculator, looks like a speculator, and sounds like a speculator, it probably is a speculator."

This is the conclusion reached by a look at the graph of the shekel-dollar exchange rate over the past month. Shekel appreciation expectations began shortly after the publication of the most recent interest rate decision on July 9. At a press conference held to announce the decision, Governor of the Bank of Israel Prof. Amit Yaron spoke in ringing tones about the "possibility of an interest rate rise in the coming months." Another influence was also a forecast published at the same event by the Bank of Israel Research Department, indicating that the interest rate would be raised in August.

The current shekel appreciation, however, did not begin immediately after the press conference; it only began on July 22. What happened then? On July 22, the Bank of Israel published the protocols that led the Bank of Israel Monetary Committee to decide to leave the interest rate unchanged. In Israel, publication of the protocols two weeks after the interest rate decision did not make waves, but the rest of the world attributed far more importance to them, probably because of the divine tremors that greeted the US Federal Reserve's protocols.

Following the publication of the Bank of Israel Monetary Committee's protocols, a series of foreign banks published position papers predicting that the shekel-dollar exchange rate would fall below NIS 3.50/$ in the short term. Leading the way was the Bank of America, which stated, "The Bank of Israel has opened the doors to a stronger shekel." What was it about the protocols that so excited the foreign banks? The protocols contained statements indicating that the committee members were expecting an upcoming interest rate hike, while their colleagues at the US Federal Reserve and the European Central Bank were thinking in the other direction. What the foreign banks failed to take into account was the fact that the June Consumer Price Index in Israel, published a week after the interest rate decision, was far lower than the forecasts, which made an interest rate increase in the near future next to impossible.

Published by Globes, Israel business news - - on August 4, 2019

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