Shekel at weakest for three months against dollar

Shekel-dollar ASAP Creative

Last week's shekel depreciation was due to the fall in Wall Street share prices not Bank of Israel forex purchases, economists say.

The shekel is trading against the dollar at its weakest for three months after reaching a 25-year high in January. In fact, since the Bank of Israel announced on January 14 that it would be purchasing $30 billion in foreign currency in 2021, the shekel has depreciated 5.8% against the dollar. The representative rate has not been set by the Bank of Israel since Thursday because of the Purim holiday but in futures trading the rate is NIS 3.31/$.

At first glance it looks like the determination demonstrated by the Bank of Israel in January, when the Bank of Israel not only made its $30 billion announcement but actually went out and bought $6.8 billion, is what has weakened the shekel. Moreover, Bank of Israel Governor Prof. Amir Yaron said that the amount purchased could exceed $30 billion.

But the initial enthusiasm for selling shekels quickly faded and within a few weeks it looked like the Bank of Israel's attempts to moderate the strengthening of the shekel had run out of steam. The appreciation of the shekel in early February raised doubts about the Bank of Israel's resolve on the matter.

Sources in the foreign currency trading market explained to "Globes" that, "The Bank of Israel was perceived as weak and so foreign banks sold large amounts of dollars at the start of February while the Bank of Israel was hardly being felt on the market. On a relatively weak day of trading, the Bank of Israel is supposed to use its strength to lift the dollar a little but it didn't do it and the dollar weakened. If the Bank of Israel has carried on enthusiastically buying dollars at NIS 3.30/$, then it was expected that it would also do it at NIS 3.28/$, and a relatively large amount, but it didn't happen."

The Bank of Israel has continued to buy dollars on the market, although on a smaller scale compared to January, but the major reason for the weakening of the shekel in recent days was the fall in share prices on Wall Street. After the rises in recent months that bought the indices in New York to record highs in mid-February, there was the anticipated correction last week, because of rising US government bond yields.

As the vaccination rollout gains ground worldwide and new infections fall, the belief is growing that economic activity is heading back towards normality and that there will be an exit from the Covid crisis in the coming months. These estimates, together with a rise inflation expectations since the beginning of the year, brought about the rise in US government bond yields and the possibility that the US Federal Reserve will hike interest rates sooner than expected, and all this weighed on Wall Street. Fed chairman Jerome Powell's attempts to soothe the market failed, when he said last week that inflation and the job market were far from their targets. In other words, expectations of a quick recovery, which were translated in recent weeks into rising inflation expectations, spotlighted US government bonds as a more interesting alternative than stocks.

Developments in the US have a close correlation to Israel's forex market because Israeli institutional investors have high exposure to Wall Street and other international stock markets. When the markets are rising, then the exposure of Israel's institutional investors rises. At the end of 2020, 21.4% of the portfolios of Israel institutional investors was in foreign currency, including hedging. When the share markets fall, the institutions are exposed to the markets, among other things through derivatives, and they need to increase their collateral and buy foreign currency - or at least not sell any - in order to reduce exposure. These activities have led to a weakening of the shekel against the dollar in recent days.

Bank Hapoalim (TASE: POLI) analysts expect the Bank of Israel to continue buying foreign currency in the coming months at a set pace of about $2 billion per month, so that the shekel-dollar rate will largely be dependent on the fortunes of the stock market. If the stock markets remain stable, then Hapoalim's analysts see the depreciation of the shekel continuing in the short term.

Regarding the dollar itself, Hapoalim's analysts see two contradictory forces. On the one hand, the expected US economic recovery due to the US fiscal stimulus package, which supports a rise in bond yields and thus the strengthening of the dollar. In addition, there is the expected improvement in the performances of Us corporations, which have streamlined during the Covid period. On the other hand, President Joe Biden's $1.9 trillion stimulation package is expected to widen the already high budget deficit, which will weaken the US dollar.

Mizrahi Tefahot Bank (TASE:MZTF) chief strategist Modi Shafrir said, "In my opinion what is contributing to the strengthening of the dollar above and beyond the stock market falls is the rise in real yields in the US. When we entered 2021 everybody was saying that the dollar has to weaken and short positions on the dollar were at peak levels. But then when something small changes in the narrative, the positions are suddenly closed and the dollar changes direction and strengthens."

Regarding the US fiscal stimulation package, Shafrir adds that that supports a rise in bond yields and contributes to the strengthening of the shekel.

Published by Globes, Israel business news - en.globes.co.il - on February 28, 2021

© Copyright of Globes Publisher Itonut (1983) Ltd. 2021 ".

Shekel-dollar ASAP Creative
Shekel-dollar ASAP Creative
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