"Bank of Israel playing poker with open cards"

Amiram Barkat

Market players see the Bank of Israel's foreign exchange moves as inadequate.

The Bank of Israel Monetary Committee decided to leave its interest rate unchanged for March, at 0.1%. The decision comes when the shekel is at its strongest against the major currencies for a long time. Foreign exchange market players, who attribute the shekel's recent surge to the growth figures for the fourth quarter of 2016, today sharply criticized the central bank's behavior in the foreign currency trading arena, saying that it was "playing a poker game with open cards against professionals."

The shekel continued to strengthen today. The shekel-euro rate reached new lows – it is currently at NIS 3.881/€. Against the US dollar, the shekel is at NIS 3.6606/$, still some way from a record low, but the reason for that is that the dollar has strengthened against other currencies, by 25-30% against the euro, for example.

In terms of the index that the Bank of Israel regards as decisive, however, the shekel is at an all-time peak of strength. This is the nominal effective exchange rate, which includes the 30 currencies of Israel's most important trading partners, weighted according to the relative weight of each country in Israel's foreign trade. Last week, for the first time ever, the effective rate fell below 80. On Friday, it was at 79.7. Today it fell further, to 79.139.

In the past, the 80 points level was regarded as the Bank of Israel's unofficial red line. In August 2014, in a surprise move, the Bank of Israel cut its interest rate from 0.75% to 0.5%, and later reduced it further, to 0.25%, in response to a decline in the nominal effective rate to 80.1. Following this, the rate turned around and rose to 88, but then fell again, forcing the bank to cut its interest rate again in March 2015 – the last time it has done so – when the nominal effective rate fell in February that year to a low of 81.48.

Foreign exchange market players said that the recent growth figures were responsible for the latest strengthening of the shekel, mainly because of the rise in exports, but these are one-time figures.

Capital market sources say that activity by foreign currency speculators has grown considerably since the latest Central Bureau of Statistics figures on the economy were released indicating strong growth, particularly in goods exports. "Foreign exchange market speculators are looking for a currency of a strong economy that has a weak central bank," says financial markets expert Shmuel Berger, "The latest export numbers, showing that exports grew despite the shekel exchange rate, persuaded speculators that the decision makers in Israel will not be overly concerned at the appreciation of the shekel and will not act to prevent it."

The Bank of Israel did in fact intervene in foreign exchange trading last week, to the tune of several hundred million dollars, according to market estimates, but Berger sees the move as inadequate.

"Daily turnover in the foreign exchange market is around $8 billion," Berger says, "If the bank wants to be effective, it has to buy $1-2 billion, not 100-200 million. It's true that that would bring the foreign currency balances that the bank manages towards the $200 billion level, but it would send the right message to the speculators. The bank should have set up a department with dealers, as the Israeli commercial banks have, and it should employ tactics that will surprise the speculators. It shouldn't just buy in set amounts, but sell as well."

The Bank of Israel said in response, "As the bank's Monetary Policy Report published a few days ago states, empirical tests show that the foreign currency purchases are effective and have an impact on the exchange rate."

Published by Globes [online], Israel business news - www.globes-online.com - on February 27, 2017

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

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