The shekel is mixed against the major currencies this morning. The shekel-dollar exchange rate is currently up 0.52% in comparison with Friday's representative rate, at NIS 3.8781/$, and the shekel-euro rate is down 0.19%, at NIS 4.3351/€.
While the prime minister is close to finalizing the make-up of his coalition, the capital market is looking towards the economic challenges his new government will face. According to a "Globes" study, the negative rate of inflation prevailing in Israel will compel the Ministry of Finance to cut planned public spending in 2015 by about NIS 4 billion. This being the case, incoming Minister of Finance Moshe Kahlon will have no choice but to initiate an amendment to the law that will allow the government to raise its spending ceiling, despite the consequences this could have for Israel's sovereign credit rating.
Last week's decision by the Bank of Israel to leave its interest rate unchanged led to the shekel appreciating by more than 1% against the US dollar. To damp the effect of its decision, the Bank of Israel has been buying hundreds of millions of dollars in the past few days, and the question arises whether it will continue using this tool, or will again resort to the interest rate tool.
FXCM Israel says in its market review this morning, "There is no doubt that the events of last week will affect the shekel-dollar pair in the short term. Those responsible for this were the central banks of Israel and the US, which very much cooled investors' expectations on interest rates, for an interest rate cut in Israel and an interest rate hike in the US. It started at the beginning of the week, with the Bank of Israel's decision to leave its rate unchanged, and with a policy statement from which it was hard to discern any clear intention on the part of our central bank to institute dramatic measures in the coming months, such as an interest rate reduction below zero or a quantitative easing program. The US Federal Reserve also disappointed investors' expectations last week, when it released a fairly tentative policy statement, causing investors to draw the conclusion that an interest rate hike, if it happens this year, will come right at the end of it.
"In short, if the factor that has propelled the shekel-dollar pair upwards in the past few months has been the expectation of a widening of the yield gap between the dollar and the shekel, as a result of continued expansionary policy by the Bank of Israel and a policy tightening by the Fed, this picture is now less clear."
Published by Globes [online], Israel business news - www.globes-online.com - on May 4, 2015
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