The volatility recorded in the financial markets since the beginning of the year does not miss the foreign exchange market. The direction of the morning and the shekel continues the sharp devaluation trend it has recorded against the dollar since the beginning of the year, especially in the last two months.
1: Markets go down, shekel weakens
Local institutional entities have high exposure to equities outside Israel and especially to equities in the US as part of the management of all of our pension funds. Like any foreign currency denominated investment, institutional investors tend to hedge their currency exposures.
With the declines in institutional markets, locals have bought over $ 7 billion since the beginning of the year to cover the decline in the value of their dollar investment according to their investment policies. The jump in demand for the dollar led to a shortage of dollars in the local market for the institutional bodies, which strengthens the dollar against the shekel.
The hedging mechanism is also working in the other direction, and as we will see this morning, due to the high adjustment of the dollar against the shekel against the US NASDAQ, it can be concluded that the direction of the financial markets will dictate the dollar against the shekel in the short term. The longer, it is likely that the surplus in the current account of the State of Israel will continue to support the strengthening of the shekel.
2: Interest rate differentials strengthen the dollar
A major reason for the strengthening of the dollar over the shekel since the beginning of the year lies in the interest rate differentials between the US and Israel. Although interest rates are also being raised in the United States, the increase in interest rates in Israel has so far been assessed as gradual, since inflation in Israel according to the CBS is low in a global comparison.
While the expectation of US interest rate hikes is climbing, interest rate differentials are widening and so is the US dollar.
According to estimates at the top end of forecasts in the domestic market, the Bank of Israel will raise interest rates by 0.4%. At the same time, questions arise regarding the impact and weight that the Bank of Israel will give to the GDP data that indicated a contraction in the first quarter of 2022. The Bank of Israel may be content with a more measured increase, after growth data released this week indicated a weakness in exports
3: Will the strength of the shekel in price containment be renewed?
In the last two months, the shekel has undergone a significant devaluation process. According to the Bank of Israel, the transmission from the shekel to the consumer price index is about 10% -14% over a year. That is, the strength of the shekel in curbing the rise in prices has weakened at a similar rate, and the potential addition to the annual inflation rate may rise accordingly in the coming months.
This move supports the need to curb inflation, although raising interest rates will not moderate price increases from overseas. However, the faster the US Fed accelerates the process of monetary contraction in the United States, the greater the chance of a decline in inflation imported into Israel, which may lead to a moderation in the rate of interest rate increases in Israel, and with it the effects on the shekel.
4: The sigh of relief of the exporters
Exporters who receive the consideration for their work in dollars, and pay wages in shekels, benefited from the change of direction recorded at the beginning of the year in light of the strengthening dollar in the world, by virtue of being a safe haven in times of crisis. However, an aggressive increase in interest rates in the economy will strengthen the shekel and may renew the harm to exporters – which supports a measured increase in interest rates in Israel.
After acquiring $ 35 billion last year to moderate the strengthening of the shekel, the Bank of Israel withdrew from the foreign exchange market since the beginning of the year. Like most central banks in the Western world, the Bank of Israel’s policy has changed. H. The Bank of Israel has not been buying dollars in the market since the beginning of the year in order to moderate the strengthening of the shekel, and its work is being done by the interest rate differentials between the United States and Israel.
5: The slowdown in high-tech will weaken the shekel
The entry of dollars into the country naturally strengthens the shekel because the supply of dollars in the market is rising. After many exits in the high-tech industry in recent years led to billions of dollars entering the country, the fear of a slowdown in the economy’s locality may lead to a decrease in investment and a decrease in the supply of dollars in the market.
Changing the policy of the central banks, by way of raising interest rates, increases the cost of money and takes a lot of air out of the prices of the Israeli high-tech companies that have been issued. These are declines of around 80% in most dream companies.
Exports of high-tech services have already fallen in the last quarter by 17%, although it came after significant growth of 35% in the previous quarter. At the new pricing levels of high-tech companies, venture capitalists may be more selective in their investments, which is expected to put less dollars into the domestic market and thus weaken the shekel.
High-tech will continue to be a leading industry and investments will not disappear overnight, but the slowdown may be reflected in cuts in workers and capital investments in Israel, which may lead to a weakening of the shekel, in contrast to the huge contribution that high-tech made to strengthening the shekel last year.