In its weekly report sent out yesterday, US investment bank Goldman Sachs noted that the shekel strengthened 1.5% last week against the dollar, more than any other currency except the South Korean won.

However, Goldman Sachs warns, "The strong correlation between shekel and tech stocks could result in shekel weakness in the event of a Blue Sweep in November (victory for Joe Biden), if this is perceived to result in higher taxes and regulations on the sector - making it an attractive hedge that is also positive carry."

Goldman Sachs observes, "The shekel resumed its strengthening trend in late September despite Israel going through a second lockdown, which is likely to impose economic consequences on an already fragile economic growth outlook."

Goldman Sachs continues, "On our estimates, however, the direction of the shekel is less a function of domestic developments and more a function of external factors, in particular tech, where stocks have also resumed their strengthening.

Goldman Sachs speculates and what will be the response of the Bank of Israel to all this. It says that the biggest question remains whether the Bank of Israel will allow the shekel to strengthen or whether it will return to its foreign exchange intervention policy, after a slowdown in September when it purchased just $280 million in foreign currency to weaken the shekel, after purchasing more than $14 billion between January and August).

Goldman Sachs expects that the Bank of Israel will intervene. It says, "Given the apparent disconnect between currency moves and domestic developments, an increase in FX interventions looks likely in our view and would point to a slowdown in the pace of shekel appreciation. This would make the shekel a relatively stable funder for other EM longs, especially for investors looking for alternatives to the US dollar and euro."

Then as previously said Goldman Sachs warns about a Biden victory potentially weakening the shekel.

Another factor effecting the shekel not mentioned by Goldman Sachs is that the recent rises on US stock exchanges requires Israeli institutional investors (investment houses and insurance companies) to increase their foreign currency hedging on investments abroad - a step which requires buying shekels. This is a more significant factor in the scale of foreign currency movements than Bank of Israel foreign currency interventions because of the relatively high levels of savings in Israel. By the same token, Israeli institutional investors are required to sell shekels when the US stock markets fall. This supports Goldman Sachs point about a strong correlation between the rate of the shekel and overseas share prices.

Published by Globes, Israel business news - en.globes.co.il - on October 11, 2020

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