The shekel has opened the week stronger and in morning inter-bank trading the shekel is strengthening by 0.31% against the dollar at NIS 3.718/$ and by 0.34% against the euro at NIS 3.985/€. Last week the shekel weakened considerably against the dollar and the euro, even though the 2023-2024 budget was passed by the Knesset and despite positive economic data.
The shekel is currently trading at its weakest since March 2020, at the start of the Covid pandemic. The weakness of the Israeli currency reflects the political and security uncertainties in Israel and the consequent investor concerns.
Meitav Dash chief economist Alex Zabezhinsky said, "The shekel exchange rate has lost its connection to economic forces, mainly the US stock market. It is currently influenced mainly by developments in the political-security arena." In other words, the budget's approval did not lead to a rise in the various indices, but the exact opposite.
Concern about continued political uncertainty is also expressed by foreign economic analysts. Wells Fargo Securities emerging markets economist and FX strategist Brendan McKenna wrote, "With the budget now approved, Netanyahu is free to continue pursuing the judicial reform agenda, which could result in renewed demonstrations and place depreciation pressure on the shekel. If governance deteriorates amid the judicial overhaul and other political priorities, we would expect foreign investor capital to exit Israel."
The sharp weakening last week of the shekel was also supported by IDF Chief of Staff Lt. Gen. Herzi Halevi, who speaking to the Herzliya Conference sent a direct message to Iran. "There are negative developments on the horizon that could lead to action," said Halevi, mentioning that Iran is moving forward more than ever towards enriching uranium. Following Halevi's comments the shekel depreciated by 1.3% and over the four days of trading last week the Tel Aviv 35 Index lost 3.5%, although it clawed back 0.7% yesterday.
In addition, Deputy Governor of the Bank of Israel Andrew Abir told "Bloomberg" that the extent of monetary tightening "has been the cost of the depreciation of the currency around the political uncertainty, increasing this premium for Israel around the judicial reforms."
Is Israel's interest rate set to rise to 5%
The shekel's weakness against the dollar is likely to add more fuel to inflation and make the Bank of Israel's efforts to tame inflation more difficult. Last week the Bank of Israel hiked the interest rate by 0.25% to 4.75% and Bank of Israel Governor Prof. Amir Yaron, cited the depreciation of the shekel as one of the factors behind the decision.
Leader Capital Markets chief economist Yonatan Katz wrote that after the budget was approved a soothing message had been expected from the prime minister about the judicial overhaul. "A combination of political and security factors contributed to a 2% depreciation of the shekel against the basket of major currencies last week. Without the shekel strengthening or a surprisingly low May CPI reading, the estimations are that there will be another rate hike by the Bank of Israel in July - a rise that will bring the basic interest rate in Israel to 5%.
Published by Globes, Israel business news - en.globes.co.il - on May 29, 2023.
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