"Our experience has taught us that to be effective, intervention should be carried out without providing insurance to market traders about the quantity, timing, and level of the exchange rate at which the central bank will buy or sell foreign currency," said Bank Hapoalim chief economist Leo Leiderman at the CFO Forum conference in Eilat today. He is one of the first top economists to publicly come out in support of Governor of the Bank of Israel Dr. Karnit Flug passive exchange rate policy.
"If the Bank of Israel were to set a lower limit for the exchange rate, it would cease to be credible within a few weeks, as happened in previous episodes. It was therefore good that the Bank of Israel acted as it did," said Leiderman.
"My conversations with Israeli and foreign investors, and reviews and articles by prominent investment houses, made it clear that the Bank of Israel's last intervention was very effective because it was unexpected, powerful, and constituted a declaration of intent about the Bank of Israel's concern from the recent volatility in the exchange rate."
Last week, former deputy governor of the Bank of Israel Prof. Zvi Eckstein publicly expressed his support for a shekel-dollar exchange rate floor.
"The Bank of Israel fully understands that a central bank cannot influence the real exchange rate for long. The relatively short history of the free foreign currency market in Israel has taught us that, ultimately, market forces and fundamentals dictate the trend over time. Nonetheless, it is completely acceptable that if the central bank identifies sharp deviations in the trend in certain sub-periods, there is room to intervene in the trading," said Leiderman in explaining the Bank of Israel's policy rationale.
Leiderman believes that long-term market forces are behind the shekel's renewed appreciation, not speculators. "There is no doubt that the shekel's recent appreciation reflects the ongoing inflow of non-financial investment by foreign residents and good present and expected current accounts and balance of payments figures. It is also obvious that positive developments in the energy sector, specifically natural gas, have a role in the strengthening of the shekel. The strengthening of the shekel is not caused by short-term speculation by foreign investors."
Leiderman implied that the shekel's renewed appreciation would be temporary, saying, "The exchange rate will mainly be affected by global trade and exchange rates. In the past few days, we've seen a growing number of analysts predicting a measured and gradual correction in the form of a shekel depreciation. An example is Bank of America strategists who advise selling the shekel in favor a 50-50 dollar-euro mix.
"It's very hard to predict investors' sentiment, but I think that this is a very positive development in terms of the function of the foreign currency market, which is now creating a wide range of opinions, only some of which believe in a further appreciation of the shekel."
Published by Globes [online], Israel business news - www.globes-online.com - on January 8, 2014
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