Merrill Lynch, Morgan Stanley recommend buying shekel

Shekels Photo: Shutterstock

The shekel-dollar rate is falling sharply after two leading US banks said that the Bank of Israel won't prevent the shekel from strengthening.

The shekel is strengthening again, following "Buy" recommendations by two of the world's most important banks: Merrill Lynch and Morgan Stanley. "Leaning-against-the-wind intervention rarely proves effective. Academic literature, as well as the BoI’s own past experience, suggests intervention against currency appreciation when macro conditions require monetary tightening tends to be less effective," Bank of America Merrill Lynch wrote. Merrill Lynch recommends going long on the shekel.

Morgan Stanley wrote that the Bank of Israel feels more comfortable with the shekel-dollar rate at current levels, and would probably not take aggressive action.

Forex market traders say that the fact that the reviews were published after a meeting of representatives of foreign banks with the Bank of Israel raises the question of whether the Bank of Israel has failed to deliver its message, and that such failure is likely to make it even more difficult to keep the shekel-dollar exchange rate at levels that will not do serious damage to the attractiveness of Israeli exports.

Last Friday, the shekel-dollar exchange rate fell by over NIS 0.04/$ to below NIS 3.44/$, following the "Buy" recommendation s for the shekel published by these two leading banks. Forex traders believe that the recommendations are particularly important, because they were written after the banks' analysts visited Israel and met several times with Bank of Israel representatives.

The Bank of Israel intervened in trading in January, buying $1.8 billion. The Bank of Israel is stepping up its intervention following the unusual statement by Governor of the Bank of Israel Karnit Flug , who said that the Bank of Israel had detected extraordinary activity by models players (mainly algorithmic funds), and by other Bank of Israel personnel at the hearing on the subject at the Knesset Finance Committee, where they said that the Bank of Israel's intervention in January was likely to be unprecedented. The shekel-dollar rate rose from NIS 3.40/$ to over $3.50/$, but the Bank of Israel believed that the market had gotten the message, and reduced its intervention.

Merrill Lynch published a detailed review on March 1, in which it recommended resuming shekel purchases to its customers. The main grounds cited for the recommendation were the positive macroeconomic performance by the Israeli economy, but it also included an unusual analysis of the Bank of Israel's intervention in foreign currency trading.

Under the heading, "Bank of Israel Intervention not Enough to Stop the Trend," Merrill Lynch explains that the Bank of Israel's "commitment remains limited to fighting sudden appreciation episodes, and interventions won’t be enough to combat the overall trend." The Merrill Lynch analysts add, "Under the current leadership, the Bank of Israel has never bought more than $2 billion, and hardly ever more than $1 billion, suggesting no appetite to fight the current account trends." The analysts also write, "The Bank of Israel’s passive intervention (only after sharp shekel appreciation) lacks the important expectation channel, and stacks up quite low vs inflows ($6.6 billion in purchases in 2017, compared with $11 billion in capital inflows during the year, A.B.). Against the structural appreciation bias and the Bank of Israel 's weak foreign exchange policy, local institutions' foreign investments should remain heavily foreign exchange hedged."

In their shorter review, the Morgan Stanley analysts admit that the Bank of Israel's intervention was the biggest risk to its recommendation for investing long in the shekel against the dollar and the euro, but they believe that the Bank of Israel is comfortable with the fact that the shekel weakened 3% as the result of its January intervention, and that aggressive intervention is therefore not expected.

The Bank of Israel's position, as previously expressed by Governor of the Bank of Israel, Market Operations Department Andrew Abir, and the Bank of Israel's spokespersons and representatives is that the Bank of Israel is unable to change the long-term trend, and that intervention in the foreign currency market is designed to correct distortions in individual cases. The Bank of Israel's approach is to measure the success of its intervention over months or years, not a few weeks. The Bank of Israel's intervention in the foreign currency market and its purchases of dollars began in response to the global economic crisis in 2008, and has not changed much in volume over the subsequent years, so that comments about the relatively low volume of purchases are also true for the period of in office of former Governor of the Bank of Israel Stanley Fischer.

Bank of Israel sources say that in the meetings with market traders, no message differing from the Bank of Israel's public statements was delivered.

Published by Globes [online], Israel Business News - www.globes-online.com - on March 4, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

Shekels Photo: Shutterstock
Shekels Photo: Shutterstock
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