Goldman Sachs Economic Research Unit has published an in-depth analysis entitled "The Unstoppable Shekel," which elaborates on the factors behind the strengthening of the shekel and concludes that the Israeli currency will continue to gain. Noting that the shekel has appreciated by 7% against the dollar in 2019, analysts Sara Grut and Murat Unur write, "We expect structural factors to continue to be a driving force of NIS appreciation."
"However, the Bank of Israel (BoI) has become more vocal about resisting appreciation and has previously shown that it has the tools to limit the pace of ILS (NIS) appreciation through FX interventions. For this reason, we expect the pace of the move lower in USD/ILS to slow, although the risk remains that USD/ILS strengthens further than our 6m-12m forecast of 3.45 in the absence of BoI FX interventions."
Golman Sachs adds that anyway the Bank of Israel only has a narrow range for maneuver in using the interest rate as an instrument. Goldman Sachs also refers to Bank of Israel's Governor Prof. Amir Yaron's comments two weeks ago about "additional tools" at his disposal.
"The question is whether unannounced FX interventions are still effective?" Goldman Sachs asks. "We have previously noted that, because the FX interventions are sterilized, they are mostly successful through the signalling channel, and would cease to be effective once the BoI hiked rates (which they did last year). The subsequent change in Governor, combined with the dovish shift among major DM central banks, does point to a ‘regime change’, which would allow sterilized FX interventions some credibility again given the backdrop of stable rates. While we would not expect them to be effective in fully reversing the year-to-date ILS appreciation, we think the Bank of Israel does have the means to keep the currency from strengthening meaningfully beyond our 6-12 month forecast of 3.45. However, we see risks of ILS appreciating beyond this level in absence of BoI interventions."
Goldman Sachs analysis outlines some of the reasons for the strengthening of the shekel including the possible listing of Israel on the FTSE's flagship World Government Bond Index (WGBI) and foreign currency hedging by institutional bodies. The final decision on Israel's listing on the WGBI will be taken over the next month. Goldman Sachs estimates that Israel will receive 0.25% of the overall index.
Goldman Sachs estimates that institutional investors in Israel sold foreign currency worth $4.8 billion in the first half of 2019, thus making a huge contribution to the strengthening of the shekel. In 2018, institutional investors purchased $7.6 billion worth of shekels.
Goldman Sachs also cites the strong growth in the Israeli economy (5.2% in the first quarter on an annualized basis), the 3% GDP current account surplus and the 4% GDP of foreign investments. Increased high-tech exports and the fall in the price of oil have also helped the Israeli economy, Goldman Sachs observes.
Published by Globes, Israel business news - en.globes.co.il - on August 11, 2019
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