Trading in the dollar today is calm. The dollar rises by 0.25%, and throughout the day it rose by a few tenths. Their current rate is NIS 3.65 to the dollar.
Do the markets anticipate moderation and reaching a compromise around the legal reform? In ‘Kan’ this morning it is reported that the coalition is sending messages for a temporary stop of the legislation in order to reach an understanding with the opposition, when according to the report, some of the talks are taking place at the President’s residence, while at the same time the Knesset’s Constitution Committee continues discussions and votes on the articles.
“The shekel will weaken to 3.85 shekels per dollar”
Lombard Odier today sees the strengthening of the shekel in recent days, is not excited and expects continued weakness in the shekel and reaching 3.85 shekels to the dollar: “Over the past months we have been cautious about the Israeli shekel and now we are making some changes to reflect our forecast that the currency will continue to weaken. The reasons for our forecast are The political confessions that prevail in Israel, especially around changes in the legal system, and the fear that politicians will interfere in the decisions of the central bank – these could lead to a decrease in the value of the currency.
“While Israel’s external balances still remain strong, they are not as strong as before. In addition, the ongoing uncertainty in Israel joins the correction in the technology sector which leads directly to a decrease in the level of investments in the sector and a slowdown in exports. These financial flows have already shown a weakening at the end of 2022 and to this is added the fact that most of Israeli exports In the technology sector it is for the USA and the expected slowdown in the second half of 2023 will further burden the state of technology exports from Israel (7% of GDP). A combination of all the factors mentioned indicates that the dollar will stand at NIS 3.85 in the near term.”
It is still too early to say that the weakening of the shekel has stopped: “Expect a renewed strengthening of the dollar”
“The weakening of the dollar in the world, along with the supply of foreign currency for salary and tax payments flooded the local market with dollars and led to the strengthening of the shekel towards the level of 3.61 shekels. In our estimation, with the exhaustion of the potential of the foreign exchange supply for salary payments, the excess demand will support a renewed strengthening of the dollar. The expected increase in interest rates this month in the US may lead to a drop in exchange rates, and will support the demand for foreign exchange from the institutional bodies in Israel” says Yossi Freiman, CEO To Freeco risk management, financing and investments.
The chief economist of Bank Mizrahi Tefahot, Ronan Menachem, also cools thoughts about a change of direction: “It should be noted that a significant part is related to the fact that the dollar is weakening globally (losing 6 tenths against the euro), partly due to the weak figure on consumer confidence in the US. Still, looking at the last month, the weakness of the shekel against the greenback is evident. There are, of course, local explanations for this that receive a lot of coverage and include the security escalation, signs of weakness in the fiscal area (weakness in revenue against an increase in expenses and question marks regarding the budget proposal and financing) and of course the continued legal dispute (when it is clear that part of the devaluation includes a risk premium due to the uncertainty of when and how it will end). When several factors work at the same time – the devaluation is indeed expected to be relatively fast.
“In the background, one should remember the connection between the devaluation of the shekel and the price pressures that may be caused if and as the devaluation is established. If the Bank of Israel finds it appropriate that the devaluation of the shekel is too rapid given the economic fundamentals, it has enough foreign exchange reserves to sell from and together with the interest rate hike that is yet to come – to moderate the weakening of the shekel. The players in the market should take this into account.
“We also need to take into account the relatively good state of the economy compared to many other developed economies. This was expressed, for example, in the growth figure in the last quarter – which led the OECD countries. High growth often supports the local currency, so if and when there is a relaxation in the local environment – look In the longer term it may support the shekel. In the meantime, the sharp fluctuations are expected to continue and as such it is advisable not to derive long-term trends from them.”
“Inflation and interest rate expectations in Israel – updated upwards”
Following the devaluation of the shekel last month, Ofer Klein, head of the economics and research department of the Harel Insurance and Finance Group, updated his inflation and interest rate forecast upwards. According to him: “Due to the large import component in private consumption, the devaluation of the shekel pushes inflation away from the Bank of Israel’s target. We have updated the inflation forecast for the coming months upwards: February to 0.3% and March to 0.5%.”
“In the next 12 months, we expect inflation of 3.2%. Accordingly, our forecast for the Bank of Israel interest rate has also increased to 4.75% in about six months. In our estimation, if the devaluation does not stop, this will oblige the Bank of Israel to an even higher interest rate.”
Smotrich vs. Lapid: “The most damaging to the dialogue”
Yesterday, Finance Minister Bezalel Smotrich attacked opposition leader Yair Lapid and said that he is “mostly blocking the negotiations” regarding the reform. The Finance Minister estimated that in the end a compromise formula would be found: “We don’t need to reach agreements on everything, but I assume that in the end there will be negotiations and at the end of A thing will be something that everyone can live with.”
Regarding the concerns of the markets and the rating agencies, Smotrich added: “Investors and the rating agencies understand that there is a political event here. In the end, they look at the budget – the reduction of regulation, the bureaucracy. How much we improve, how much we promote a free market, lowering the burden of taxes and infrastructure, how well we know how to identify the weaknesses of the Israeli economy and take care of them – increasing the participation rate of the groups that participate less. This is the insurance certificate of the Israeli economy. I am convinced that the Israeli economy will not be damaged but will emerge strengthened. Crises lead to construction, that’s how it was in the past and it will be the same with this crisis.”
And what about the USA?
“The interest rate in the US will reach 5.5% and the market is far from pricing in the increase; We prefer stocks outside the US – mainly China and emerging markets,” says Stephane Monnier, the Swiss bank’s chief investment officer at Banque Lombard Odier. “During the first six weeks of 2023, markets rose on the belief that the Fed would slow rate hikes due to the weakening growth of the US economy, but this remains firm as inflation rises. Fed funds futures imply a record interest rate of 5.5%, which is consistent with the Fed’s words , and we believe that a discourse on lowering interest rates will only be relevant in 2024.
“We expect further interest rate hikes in March, May and possibly even June to a peak of about 5.5%, which will probably lead inflation to about 3% by the end of the year. A potential increase in commodity prices is another external risk to the inflationary forecast. There is no doubt that the biggest risk The market now has inflation and the possibility of higher interest rates, and the meaning is that investing in a volatile market requires active management.”