Merrill Lynch sees strong shekel in 2018

Shekels Photo: Shutterstock
Shekels Photo: Shutterstock

The investment house revised its shekel-dollar exchange rate forecast from NIS 3.80/$ to NIS 3.70/$.

The shekel is expected to remain strong well into 2018 due to the speculative character of recent shekel purchases according to the Merrill Lynch investment bank, a subsidiary of the Bank of America. According to Merrill Lynch analysts, the Bank of Israel will be unable to stop at occasional purchase of foreign currency in the markets, and will have to postpone its planned interest rate hike in 2018 if it wants to effectively combat the downward pressure on the exchange rates of the shekel against other currencies.

The Bank of Israel bought $5 billion in 2016 in the markets, compared with $9 billion in 2015, but the shekel exchange rate against most currencies continue to climb, with the effective exchange rate reaching its highest point in many years. The effective exchange rate weighs the shekel exchange rates against the currencies of Israel's main trading partners.

In a review published yesterday, Merrill Lynch lowered its forecast for the 2018 shekel-dollar exchange rate from NIS 3.80/$ to NIS 3.70/$. The investment bank now believes that the interest rate will rise by only 0.5%, from 0.1% to 0.6%, during 2018. In the medium term, on the other hand, Merrill Lynch expects some correction in the shekel exchange rate to result from cashing in on the recent fall in the exchange rate, which it says was too steep.

Gas discoveries - no effect

In its review, Merrill Lynch devotes a great deal of attention to the effect of the natural gas discoveries on the exchange rate. The investment bank believes that the transition from imported energy to local gas has saved the economy $11 billion since 2013 (when gas began flowing to the shore from Tamar), but that this had no real effect on the exchange rate, because of the Bank of Israel's purchases of dollars. Merrill Lynch notes that a deal was recently signed to export $10 billion of natural gas to Jordan, while each $1 billion of exported gas causes a 0.8% appreciation in the shekel.

Merrill Lynch believes that the Bank of Israel is in no hurry to establish a Sovereign Wealth Fund - the real solution to Israeli gas exports. The investment bank also says that gas is only one of the factors creating appreciation pressure on the shekel, citing the flow of direct investments and the anticipated addition of Israeli government bonds to the World Government Bond Index (WGBI) as other factors likely to strengthen the Israeli currency.

Published by Globes [online], Israel Business News - www.globes-online.com - on April 6, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

Shekels Photo: Shutterstock
Shekels Photo: Shutterstock
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