The shekel is weakening today against the dollar and against the euro. In early afternoon inter-bank trading, the shekel-dollar exchange range was up 0.52% against the dollar at NIS 3.308/$, and up 0.38% against the euro at NIS 3.934/€.
Bank Leumi analysts believe that assuming that the Bank of Israel will continue intervening on the foreign currency market on the same scale, exceeding the annual purchasing program that it previously set, then the current exchange rates should remain until the end of the year.
Yesterday, the Bank of Israel set the representative shekel-dollar rate 0.213% higher from Friday, at NIS 3.291/$, and the representative shekel-euro rate was set 0.343% higher, at NIS 3.919/€.
Earlier this month, the Bank of Israel published its foreign exchange reserves, which showed that it had already implemented 46% of its $30 billion foreign currency purchasing program for all of 2021. Bank of Israel Governor Prof. Amir Yaron has already clarified that the bank might exceed the originally planned amount and at the current pace, it might buy as much as $40-50 billion in foreign currency this year.
Bank Leumi head of market strategy Kobi Levi said, "The huge purchases are preserving the value of the shekel. In our opinion, in the absence of negative triggers, the intervention of the Bank of Israel will achieve this aim but won't be sufficient by itself to weaken the shekel."
Levi estimates that on the assumption that the dollar will weaken worldwide through to the end of 2021, the average rate of exchange of the shekel against the dollar is expected to trade in the NIS 3.25-3.35/$ band, although the shekel could trade outside this range for short periods following market surprises.
Levi said, "The NIS 3.30/$ exchange rate has become the new normal. There are several contradictory forces that are expected to influence the strength of the shekel over the next year, including the basic forces, the current account surplus and capital movements. On the other hand, there are the huge foreign currency purchases by the Bank of Israel and quantitative expansion, which balance out these factors and support the weakening of the shekel."
"The answer as to what the value of the shekel will be later in the year will be a result of the balance of these forces. At the moment we see the current account surplus being smaller than in 2020 and closer to the average of the past five years prior to that - around 3.5%. This surplus will continue to support the strengthening of the shekel but less than last year."
Levi explained that the reason for the fall in the current account surplus is the opening up of the economy and the return to normality. "The rise in private consumption, the rise in investments in raw materials and equipment and the rise in commodity prices worldwide, support increased imports. Exports will probably continue to grow led by the high-tech sector, semiconductors and natural gas. In the capital movement account, the entry of foreign investments is expected to continue."
Levi cites the presence of foreign investors in Israel's bonds market as another factor supporting the shekel and causing the bond market to rise sharply. "If in all of 2020, foreign investors bought government bonds worth about $5 billion, since the start of 2021 this amount has doubled. On top of all this you have to add the fact that the rate of exposure to foreign currency in terms of the scale of the assets of institutions, which is at record levels, will probably lead to supply of foreign currency, which will grow in the case of the shekel weakening."
Levy mentions inflation as another factor that could impact the strength of the shekel. "Israel was exceptional worldwide last year in this context. Real interest in Israel (the rate of inflation minus nominal returns) was positive, because inflation was negative and interest was zero. In contrast to this, over the next year, inflation is expected to be higher. The real interest rate environment should become negative and reduce one of the forces that supported the strength of the shekel last year."
Published by Globes, Israel business news - en.globes.co.il - on April 13, 2021
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