Israel's forex market won't open until Monday morning when the start of trade will reflect the market's reaction to the downgrade of Israel's credit rating by Moody's on Friday night. On Friday, ahead of the announcement, the shekel weakened against the dollar to NIS 3.67/$ and since the start of the month the Israeli currency has depreciated by over 1%.
"The government's response to the rating decision will lead to a depreciation of the currency"
Bank Hapoalim chief financial markets strategist Modi Shafrir says, "The ratings cut has for the most part been priced into the market but the outlook cut was less priced in and was surprising." Shafrir stresses that after the outbreak of the war the markets began to price Israel as a country with a BBB rating.
He adds, "The responses by senior figures in the government to the ratings decision could impact the currency in the coming days and bring about a depreciation on the foreign exchange market." Shafrir points out that Fitch will also soon publish its announcement and it could also decide on a cut.
On the other hand, Mizrahi Tefahot Bank chief economist Ronen Menachem thinks it is difficult to estimate the strength of the reaction of the shekel when trading opens on Monday, and its behavior after that.
He says, "The lowering of the rating itself was not any big surprise and was priced into the market, at least partly.
It should also be noted that quite a few economic parameters in the report were remarked on positively, including the stability of the banking system and employment, and the relatively rapid recovery of the price indicators of economic activity."
In Menachem's opinion, it is more likely that the market will react to the fact that the rating outlook remains negative, since "This will extend the duration of the economy's return to its previous level, but even here it is difficult to estimate the strength of the depreciation and how long it will last."
Meitav chief economist Alex Zabezhinsky explains, "The market will act according to what is happening in the economy and in the war and will react less over time to Moody's rating downgrade. Moreover, the event was nothing new as the rating downgrade due to the war was something that was expected in the markets, and even if the outlook downgrade was a surprise, it was due to concern about worsening developments on the northern front." Zabezhinsky says that a war in the north would certainly lead to a deterioration in the economy and the foreign exchange market as well, and therefore here too, Moody's did not add much.
Estimates are that the shekel will strengthen in the future
Shafrir says, "In the short term, the trend will be determined according to political developments and the war. Reaching a cease-fire agreement and release of hostages will lead to an appreciation, but on the other hand, an escalation in the north and a war against Hezbollah would greatly weaken the shekel. Looking a year ahead, assuming geopolitics and politics stop weighing heavily, the basic forces support a strong currency and will lead to its strengthening in the future."
Menachem agrees that defense and diplomatic developments will continue to influence the foreign exchange market. He says, "The shekel will continue to react, sometimes strongly, on events and information from the field, with an emphasis on scenarios where the strength of the fighting is reduced and there are indications of some sort of diplomatic settlement, which would certainly lead to an appreciation. This is, among other things, both due to the continuation of the rally in the US stock market (which normally supports the strengthening of the currency) and because, as a rule, the shekel is underpriced against the dollar."
Menachem also speaks positively about the words of Bank of Israel Governor Prof. Amir Yaron who responded in an encouraging way after the decision. "The Bank of Israel has recently spoken time and again about its confidence in the local economy. As known, the Bank of Israel has very large foreign exchange reserves (also in terms of GDP) and with the outbreak of war announced a plan to sell up to $30 billion of its reserves in order to prevent excessive volatility in the market. This factor by itself can moderate the strength of the depreciation in the currency." In general, the presence of the Bank of Israel - the responsible adult - in charge of the situation, definitely supports the shekel, Menachem stresses.
Zabezhinsky emphasizes that the rate cut won't change much for Israel in the markets. He says, "Cutting the rating from A1 to A2 won't bring substantial changes in foreign currency, investors' behavior changes only when the company cuts the rating beyond the 'investment level,' beneath the low rate of BBB.
Futures trading has the shekel weakening by 0.31% against the dollar to NIS 3.678/$ indicating a moderate depreciation when forex trading begins tomorrow morning.
Published by Globes, Israel business news - en.globes.co.il - on February 11, 2024.
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