"The Bank of Israel is monitoring developments in the shekel exchange rate in the light of the basic conditions of the Israeli economy, and these conditions clearly point to a strengthening of the shekel. It is therefore only natural that the Bank of Israel should allow the shekel to continue to strengthen to some degree, as the basic conditions require," Bank Leumi foreign exchange and derivatives strategist Kobi Levi writes in a market review.
Levi writes that central bank intervention is likely to curtail the strength of the shekel's appreciation and to control it, but not totally to block these forces or to support a result different from the one that the basic forces dictate. "In our view, the Bank of Israel will therefore reduce its intervention in the markets, so that towards the end of the year its involvement in the foreign exchange market will be relatively small, in comparison with what we saw in the first half of 2021, and will be more similar to the extent of foreign exchange purchases that characterized the Bank of Israel's policy before the coronavirus pandemic."
In such an environment, the shekel can be expected to strengthen fairly rapidly against the US dollar and the basket of currencies, and the chances of an interest rate rise in the coming years, which were low to start with, are falling. "In our view, the average exchange rate of the shekel against the US dollar up to the end of 2022 will be in the range of NIS 3.15-3.25/$. A significant risk factor that could upset the trend for a short period and weaken the shekel is a substantial global sell-off in the equities market, particularly in the US. With current high levels of dollar liquidity, however, the chances of a double-digit percentage drop that would trigger such a response are lower than in the past."
Levi further writes: "From a macro-economic point of view, the shekel is strengthening because of basic forces supporting that, among other things a surplus on the current balance of payments and an unprecedented influx of foreign investment in Israel, both direct investment and via the stock market. According to the estimate released by the Bank of Israel yesterday, in the course of the second quarter, financial institutions (pension funds, provident funds, and insurance companies) made net sales of foreign currency amounting to $11.1 billion, and foreign residents sold foreign exchange against the shekel amounting to $5.8 billion. On the other hand, the business sector reverted to net purchases of foreign exchange, to the tune of $3.5 billion, after net sales in the previous quarter. These figures demonstrate that supply of foreign currency in Israel is substantially higher than demand, and in such an environment, a strengthening of the shekel is a clear outcome."
Published by Globes, Israel business news - en.globes.co.il - on September 14, 2021
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