After a particularly dramatic day in the foreign exchange sector, in which the shekel weakened to low levels not seen since the corona crisis about three years ago, today (Wednesday) it stabilizes against the euro, at the level of 3.88 shekels, and against the pound, at the level of 4.42 shekels. The surge of the dollar, which earlier passed the 1% mark, decreased to an increase of only 0.3%-0.2%, when its rate was NIS 3.65.
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However, when the first readings of the legal reform laws in the Knesset continue in the background, the question still arises – is this an appropriate time to purchase foreign currency? The answer to this is not clear-cut and quite complex. Globes contacted economists in order to understand what the climate in the foreign exchange market is and how, if at all , must be addressed.
Shmuel Berger, an expert and consultant to large companies in financial risk management and formerly the owner of a company that dealt in this field, says that there is no doubt that now is the time to increase the volume of foreign exchange in the investment portfolio. “Increasing the composition of foreign exchange is not necessarily dollars, but also through deposits or bonds H,” says Berger, “the Israeli banks, for all sorts of reasons, are willing to pay customers over 6% annual interest on large deposits. The reason for this is that the banks have problems with the European banks’ risk factors.”
On the other hand, Yossi Freiman, CEO of Frico, risk management in foreign exchange and investments, emphasizes that first the investor must decide if he has a need for foreign currency at all. “If the decision comes from an impulse of insecurity – the question is how much am I willing to risk or what am I willing to pay for the feeling of security,” Freiman points out and adds that in his opinion “the considerations should be more business-like – for example, if I fear that the changes will harm my company in Israel, I I will buy foreign currency to prepare for leaving Israel. The feeling of insecurity has a price.”
Berger adds that investments in the currency may allow a kind of compensation for losses in stocks or bonds: “If the problematic political situation continues and the legal reform in its current form passes a second or third reading, the foreign exchange channel will be the only place that will allow investors to compensate for the losses in the investment portfolios.”
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The foreign exchange market has very different characteristics from the stock markets. “There is an ability to leverage with very little capital and in large volumes,” Freiman explains, emphasizing: “Whoever doesn’t like heat, shouldn’t go into the kitchen. This is a volatile market with many changes. The more correct move in my eyes is caution and investing in baskets or indexes and not full reliance on the currency market or the stock markets.” Freeman also says that the sharp weakening of the shekel yesterday was related to the “turbo movement of the currency”, when institutional investors bought more than $2 billion to protect themselves from the sharp declines recorded in the local stock exchange.
Nevertheless, if the decision has been made to take a risk and buy foreign currency, what is the safest way to make the move – should you purchase cash or invest in foreign currency-biased assets? And should you focus on the dollar or can you look into other currencies as well?
According to Berger, the bias in the investment portfolio should be slightly in favor of abroad. “We are not behind the curve on the legal revolution. When we know what will happen to the legislation, we will also know what will happen in the foreign exchange market. As long as there are chances for talks between the coalition and the opposition, I think there is no need to run and convert everything into foreign currency. I think the composition of the case should be roughly 60/40 in favor of abroad versus Israel.”
He further adds that if it is a large investment volume then it is possible to reach 50% cash, “For those who want to invest several thousand or tens of thousands of shekels, I recommend dollar bonds. There are risks everywhere, but the considerations must be adjusted according to each client “.
Meanwhile, Berger points out that “the world’s view of Israel in recent years is what created the strong shekel. But two things happened recently: some start-ups collapsed and a great many ‘unicorns’ lost height as a result of the global crisis, and raising money became a more complex task. To this must be added the high interest rate in Israel and the fact that inflation here is high, and in my opinion it will not go down quickly. This will not happen without a sharp slowdown or a recession, even regardless of the reform.”
Building a basket that will reduce the risk
According to Freeman, the right move is to invest in currency baskets in light of the global trend of raising interest rates. “It is correct to build a basket to reduce the risk. There is an index called DXY with six currencies that are tested against the dollar. Although it should be noted that at a historical level – the index is at high levels. If in the US there is a slowdown in the rate of inflation or government moves to encourage economic activity, the index may fall. Investors should look at the risk and return component, then build a ‘cocktail’ of assets. Not only foreign exchange, but stocks as well. In any case, it is very individual per client.”
Both economists agree that the law reform has a significant impact on the stability and strength of the shekel. According to Freiman, “If the talks on a compromise continue next week and there are talks between the parties, we may see a relaxation in the foreign exchange. Investors who have fewer options for an immediate response, so that they open their eyes and pay attention to the political climate.”
Freeman tries to summarize: “Those who enter the foreign exchange market should understand – this event appeared suddenly and it can also disappear suddenly. The market risk is over 10%. This is no place to play. Even if Israel’s economy weakens, the processes take time and the downgrading of the credit rating will not happen overnight. It’s very important not to panic – that’s the big risk.”