Governor of the Bank of Israel Prof. Amir Yaron said last week, "Part of the shekel appreciation is a result of short-term financial factors." Bank Hapoalim's economists believe that they know who is behind the shekel appreciation that Yaron was talking about, and explain when the trend will change.
Bank Hapoalim wrote today that the financial entities responsible are Israeli investment institutions: provident and pension funds. "Between the beginning of 2019 and November, they sold $5.9 billion in foreign currency (some of it in hedging transactions)," Bank Hapoalim says. "The sale of foreign currency by these institutions is due to the sharp increase in prices on the global capital markets, which increased the value of their overseas investments. In order to reduce their exposure to the exchange rate, they are selling foreign currency through hedging activity. If we see a drop in global share prices, the investment institutions will likely buy foreign currency."
The strengthening of the shekel is a burden for exporters in Israel. Up until recently, the Bank of Israel reserved intervention in the foreign currency market as a tool against speculators. Once it ended its intervention in forex trading, the strengthening of the shekel quickly picked up speed, forcing the Bank of Israel to resume its purchases. Last Friday, the Bank of Israel again intervened in the forex market in order to halt the shekel appreciation. Last December, the Bank of Israel purchased $2.3 billion in foreign currency after purchasing $1.2 billion in the preceding month.
At a press conference held before the publication of the Bank of Israel's interest rate decision last Thursday, Yaron said, "Throughout most of 2019, the strengthening of the shekel was striking compared to other currencies, and in our assessment, the shekel strengthened beyond what would have been expected as a result of the economy’s good macroeconomic fundamentals."
He continued, "As a result, the exchange rate deviated from the window that is in line with continued solid economic activity and price stability. The transaction data that the Bank of Israel collects indicate that the appreciation was partly the result of short-term financial factors, which were liable to adversely impact economic activity and the return of inflation to within the target range."
Yaron emphasized that the Bank of Israel was ready to prevent exceptional appreciation of the shekel through purchases of foreign currency, "whenever necessary, and particularly to the extent that we assess that the appreciation is the result of relatively short-term financial factors."
Published by Globes, Israel business news - en.globes.co.il - on January 12, 2020
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