Shekel shrugs off volatility despite ongoing war

Shekels credit: Shutterstock Vladerina32
Shekels credit: Shutterstock Vladerina32

After 18 months of volatility due to the judicial reform and war, analysts explain why the shekel has stabilized in recent months and speculate on its future direction.

Israel's foreign exchange market has been highly volatile over the past 18 months, due to the political uncertainty in Israel and then the war. The shekel, which had already depreciated significantly during the disputes over the judicial reform, weakened even more as a result of the war, at one point trading at NIS 4.08/$. But the Israeli currency has been able to recover to around NIS 3.70/$.

Had it not been for the upheavals of the past 18 months, many believe the shekel would have been stronger than NIS 3/$. This is mainly due to the fact that in 2022, the shekel was one of the strongest currencies against the dollar. The Bank of Israel recently presented a model showing that if it were not for the effects of the war and the judicial reform, the Israeli currency would today be trading at NIS 3/$, NIS 0.70 below its current rate.

The Bank of Israel's calculations straightforward, predicting the price of the shekel impacted by the effects of bullish US markets, because there is a strong correlation between Wall Street and the shekel. If the correlation were maintained, we would see the shekel continue to strengthen in the wake of the sharp increases in the US market.

Poria Finance chairman Or Poria explains that the reasons for the shekel's recent volatility were short term. "Each event that occurs affects the market for only a short time, and then the market recovers," he says. Without Israel's internal problems, Poria estimates that there would have been an appreciation of about half a shekel, towards an exchange rate of NIS 3.2/$.

The reason for the shekel's currently strange stability, says Poria, is that the risks in Israel are already priced into the foreign exchange market. He explains, "Without a change in the existing situation here or there, the market will continue to contain the risk premium and be sensitive to events."

Not only does the correlation with the US markets make one feel that the shekel is in the wrong place, Israel's internal data also continue to point to this. Even before the war, Israel's economic picture looked excellent: a low debt-to-GDP ratio, the deficit approved in the original 2023 budget was considered to be restrained in light of the anticipated fall in revenues, and even if the government did not contribute to Israel's long-term goals, the economy was robust.

Even today the domestic data are positive. Earlier this week, the Central Bureau of Statistics reported that the surplus in Israel's current account reached $6.7 billion at the end of the first quarter of 2024. Although the figure is lower than the previous quarter, it is higher compared with the previous year. The balance of payments shows money entering Israel compared with the money leaving, so a surplus in the balance indicates more money coming into the country than going out, and this contributes to the strengthening of the shekel.

Leader Capital Markets chief economist Jonathan Katz tells "Globes," "When there are no extreme events and increased risks, then the balance of payments is a very important parameter. It indicates the strength of the economy and shows an excess of exports over imports and can affect the shekel in the long term." Katz explains that this is a positive parameter for the rating companies and foreign investors. "There is a surplus of exports and this means that the basic forces have foreign exchange coming into the country and this is expected to strengthen the shekel."

Another basic element is foreign real investments in Israel. Katz explains that this factor, which includes capital raised by tech companies, has strongly supported the shekel in the past. In the first quarter of the year, the pace of increase of these investments fell. Direct investments by residents abroad in Israel rose in the first quarter of 2024 by $1.2 billion, compared with a rise of $2.6 billion in the previous quarter. "Currently this element hardly supports the shekel," Katz stresses, but adds that there are signs of recovery, if investment volumes return, this would be very good news for the Israeli currency.

Recently published data that Katz also refers to are financial capital movements - what institutional bodies are doing with their investment portfolios. Since the upheavals in Israel began, there has been an increase in foreign exchange exposure of these entities. However, Katz points to a slowdown: "In April, Israeli institutional bodies sold net foreign exchange amounting to $3.4 billion (after selling $2.8 billion in March). The institutions reduced their exposure to foreign exchange (in relation to total assets) to 21.7% in April from 22.6% in March. The sale of foreign currency by institutions in April was partly due to increases in the value of shares abroad."

Katz says that in April it was possible that institutions (mainly insurance companies) preferred to reduce their exposure to foreign exchange due to some optimism regarding an approaching ceasefire.

Major overseas banks optimistic on the shekel

Despite everything, major global banks foresee a positive future for the shekel. For example, the Swiss bank EFG International predicts that the shekel will bounce back and strengthen later this year, and forecasts the possibility that the dollar rate will fall below NIS 3.6/$. Poria also believes that the shekel is expected to continue to strengthen, and as the war nears its end, or a hostage deal is struck, the Israeli currency is predicted to appreciate again. But apparently, as long as the uncertainty surrounding what is happening in Israel is great, the shekel will maintain a certain depreciation in relation to its real value.

The main factors clouding the markets come mainly from the war in which Israel is embroiled, but the country's internal data are still positive. This is most evident in Israel's credit rating: despite extremely low pricing in the markets, the rating companies have given the country high marks even during the war.

However, the flight of capital and the wealthy preferring to remain elsewhere while Israel is mired in Gaza, could affect Israel's economic future. If wealthy investors do not return, the factors previously mentioned that have supported the shekel in recent years will not be relevant and it will take years for the state to rehabilitate them.

Published by Globes, Israel business news - - on June 20, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

Shekels credit: Shutterstock Vladerina32
Shekels credit: Shutterstock Vladerina32
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