Despite the war in Gaza, the threat of new fronts being opened, Israel's soaring budget deficit and a range of other economic factors that would ostensibly be expected to weaken the shekel, the Israeli currency is at a six month peak against both the US dollar and the euro.
On Friday, the final day of trading before the international forex markets closed for the Christmas holiday the shekel again strengthened, dipping below NIS 3.60/$ for the first time since the summer, while the euro remained below NIS 4/€. The shekel is less than 1% weaker than it was at the start of 2023, before the judicial reform, the huge demonstrations, the terror attacks of October 7 and the war that has followed.
Leader Capital Markets chief strategist Yonatan Katz analyzes the main reasons for this current surprising dynamic for "Globes." He says, "It is certainly a surprise. First and foremost we are talking about the surprising rises record on overseas stock markets." For example, the Wall Street S&P 500 Index has risen more than 16% in the past two months
The rises in November in the US market," he continues, "were the highest for 40 years. Such a rise was not expected."
As demonstrated in the past, rises on foreign stock exchanges require Israeli institutional investors to sell foreign currency on the local market and buy shekels.
In addition, adds Katz, "The market has priced in that the war in Gaza will not spread to a more significant war in the north." The third reason, in his opinion, is, "The Bank of Israel is conveying that it will continue with a very restrained monetary policy, with no plans to cut the interest rate very significantly soon."
This is in contrast to the situation in the US where the Federal Reserve is talking about future cuts in 2024 with dovish rhetoric similar to the European Central Bank. Expectations that the Bank of Israel won't cut the interest rate in the Monetary Committee's decision next week has further strengthened the shekel.
However, Katz warns that there may be, "Excessive optimism on the markets about the political environment after the war." Both regarding the chances of the judicial reform being shelved and also that the budget framework won't be breached, future government investments in defense and a possible credit rating cut. "The foreign exchange market is not pricing concerns about harm to fiscal credibility in the absence of a credible economic plan including cuts in civilian spending," he explains.
The fact is that the shekel against the basket of major currencies is not far from where it was at the end of 2022. Katz says, "Back then there was a stable forecast, positive horizon, prosperous high-tech, optimism and relative security." All this raises questions about whether the shekel's "current value is justified," says Katz.
Part of a global trend
With the expected changes in the US interest rate policy and other factors, the appreciation of the shekel is part of a trend affecting other currencies.
The Swiss franc is at its strongest for nine years against the US dollar. The Japanese yen has strengthened 5% against the dollar in December alone while the dollar itself is at a five month low against the world's major currencies and has fallen about 2% against the currencies in 2023.
The euro is also performing strongly against the dollar, having risen 5% over the past three months to $1.10/€ despite pessimistic data on sluggish economic performance and even a recession in some Eurozone countries.
Harel Insurance and Finance economic and research department head Ofer Klein tells "Globes," "I've not been surprised by the fact that the shekel has strengthened but by the speed and power of it. He adds that the meteoric rise on the US stock market in recent months explain a great deal of the strengthening of the shekel due to the fact that institutional investors (like Harel) who are exposed to these indices receive a boost from the markets and returns in dollars, which they convert to shekels.
Klein adds, "The dollar like every product is subject to supply and demand considerations. When there are a lot of dollars, the price of the dollar falls and the price of the shekel rises. The question is whether here in Israel there are a lot of dollars and what are the reasons for this."
In addition to the exposure of institutional investors to soaring overseas stock market indices, Klein says that the war itself has created an absurd situation in which Israel's current account surplus has strengthened. "Israelis are consuming less, in other words importing less, while Israeli exports remain relatively stable and so there are more dollars in the current account and this brings an excess of dollars and strengthens the shekel," he explains.
Klein also mentions the trend of the shekel appreciation against the dollar as being part of a global weakening of the US currency.
On interest rates, Klein does not believe that Israel will follow a different path than the US and the Eurozone: "I don't see a situation where the interest rate in the world is falling and in Israel it is not, so it is not a dominant factor."
An agenda without the judicial reform
There is another factor whose impact is not yet known - the judicial reform, which has been taken off the public agenda at least for now. In the past, Bank of Israel Governor Prof. Amir Yaron estimated that the judicial reform, the public storm and the threat posed to the economy had brought about a 10% depreciation of the shekel's value. Now, most estimates are that it will not be put back on the agenda. Katz says that the very fact that the market thinks that the judicial reform is now off the agenda also strengthens the Israeli currency. Klein, however, thinks that this issue cannot be attributed to the strengthening of the shekel.
Looking ahead, Bank Leumi head of markets strategy Kobby Levi thinks that the factors that weakened the shekel over the past year (negative sentiment factors) will continue to play a role. For better or worse uncertainty will be high in the coming months. He says, "But later in the year, on the assumption that the negative sentiment will fade, the basic forces of the current account surplus and incoming capital movements to Israel will lead to a moderate appreciation of the shekel."
Published by Globes, Israel business news - en.globes.co.il - on December 25, 2023.
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