The foreign exchange market has been in turmoil since the beginning of the year. The shekel has depreciated against the foreign currencies and the voices stating that the Bank of Israel will intervene in the foreign exchange market are getting stronger. In two and a half months, the shekel has weakened against the dollar by 4%, a weakening that can significantly affect inflation in Israel.
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Last week it was even claimed that the Bank of Israel reacted to the shock and started selling dollars. But why is the foreign exchange market interesting to the Bank of Israel, did the bank really intervene and what are the consequences of this?
Why is the foreign exchange market interesting to the Bank of Israel?
The Bank of Israel is confident in the stabilization of prices in the country. The bank can intervene in the foreign exchange market in order to stabilize the price of the shekel against the basket of currencies.
In an article previously published by the Bank of Israel, they explain that there are two main motivations for the central bank’s intervention in the foreign exchange market: the first is when there is high volatility in the exchange rate – then the bank’s intervention will come in order to moderate and calm the market. Another reason is to minimize deviations from the nominal exchange rate trend – which the bank wants to keep.
In addition, the Bank of Israel has a lot of dollars. The foreign currency balances held by the Bank of Israel have increased by more than 8% since last September, and the volume of balances is approximately $195 billion. The level of balances currently stands at 39% of GDP in the economy. The bank holds these balances as a backup source for an economic emergency and the collapse of the local currency When the amount of balances that the bank holds is large and beyond the need for emergency backup, it can sell dollars that it holds, also with the aim of stabilizing and mitigating the fluctuations in the market.
Has the bank intervened in recent days?
Last week it was claimed that the Bank of Israel had indeed started selling dollars, but Globes’ conversation with senior economists in the economy ruled out the possibility that the bank had already intervened in the foreign exchange market.
However, the option of intervening in the foreign exchange market is still on the table, and is even presented as a reasonable course of action later this year. The Bloomberg news agency reports that the last time the Bank of Israel intervened in the foreign exchange market and sold dollars to strengthen the weakened shekel was only during the Corona crisis, In March 2020. During that period the shekel crashed by 10%.
Alex Zebzinski, Chief Economist at Meitav Investment House, believes that the Bank of Israel will not intervene in the foreign exchange market. According to him, “there is no reason for the bank not to announce an intervention in the foreign exchange market, when such an announcement will calm the market and bring stability.” In order to know what actually happened, we will have to wait a week until March 6, when the bank will publish the foreign currency balances that are in the bank in February, and thus the public will know whether a change actually occurred and how.
What are the consequences of the bank’s intervention?
The intervention of the Bank of Israel can stabilize the foreign exchange market and bring certainty to the market. But on the other hand, intervention in the foreign currency market has substantial disadvantages. The Bank of Israel has a finite amount of foreign exchange reserves which are kept as security for emergency situations – if the bank sells all the foreign currency reserves His h and the shekel does not stabilize enough, it can cause the collapse of the currency.
According to Yossi Freiman, CEO of Prico, “It is important to remember that the current situation is caused by the political effect. The bank’s intervention will not solve this problem, what’s more, the bank does not operate traditionally within the foreign exchange market. The bank does not intervene to make a trend change, but only in isolated cases.”
Harel Gilon, joint CEO of Oppenheimer Israel, actually thinks that the Bank of Israel will intervene in the foreign exchange market depending on the market situation. The bank’s intervention in the market will contribute to the stability of the currency at a time when uncertainty is great. “Big upheavals, such as the ones we are experiencing now, undermine the stability of the foreign exchange market, a market where stability is an extremely important element. Therefore, we see a situation in which the bank will indeed intervene in the market if indeed the drastic fluctuations continue.”
Does this indicate an increasing risk of the shekel?
The investment bank Goldman Sachs estimates that the devaluation of the shekel reflects a risk premium of 8% that did not exist two months ago, and does not reflect the variables in the market. “The risk reflected in the shekel appears to be a non-long-term risk. The trend in the shekel in the last month is most likely due to local developments, and until it ends we will not see a change in the shekel,” the bank concludes.
Compared to Goldman Sachs’ analysis, Wells Fargo Bank expresses optimism about the shekel and claims that the sales of the shekel that reduced its exchange rate against the dollar have ended their operation. In recent days, Wells Fargo published a review in which they estimated that the Bank of Israel would intervene in the foreign exchange market, in order to restore order, and that the shekel would strengthen sharply as a result.