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Wednesday, August 20, 2014

Update on The Israeli Shekel...From Strength to Weakness

The Israel Shekel has experience a very large drop vs the US $ and the Euro. Several factors seem to be at work (see chart below) from a trend of late of strengthening it is now down 15% for the year

·         Large scale intervention by the Bank of Israel $1.4 billion in July of which $290 million was part
of a program to offset the impact of investment in the natural gas exploration project.

·         Interest rate cut by the Bank of Israel to .5% a reversal of concerns over inflation.

·         Pessimism for the Israeli economy at least in the short run as an impact of the current security situation.

·         Because of slowing economic growth increased likelihood of further cuts in interest rates or certainly now increases due to fears of inflation.

·         Bank of Israel intervention also seen as an effort to increase exports or exporters’ profits.

·         Doubtless there has been a massive reversal of leveraged currency positions by speculators.

·         Exporters and foreign investors with the need to purchase shekels accelerating their purchases.
Many analysts don’t expect the shekel to weaken beyond 3.600—although many said the same about the 3.50 level. Merrill Lynch analysts expect continue intervention in the market reversing central bank statements that they would not intervene in an effort to help exporters

In any event there has been a sharp change in the direction of the exchange rate and the seeming “consensus of analysts” speaking now of 3.600 a opposed to the forecast of 3.200 just a couple of months ago.
This is another indication of how difficult exchange rates around the world are to forecast. And the leveraged trading and size of the currency markets mean that when trends reverse the moves can be large and swift.

Interactive chart can be found here 

Update August 25

The Bank of Israel lowered its benchmark interest rate to an all-time low of 0.25 percent from a previous 0.5 percent on Monday, its second straight monthly reduction aimed at boosting economic growth.
All 10 economists polled by Reuters had forecast no move, which came amid a seven-year low in the inflation rate and data showing Israel's economy was weakening.
Growth is forecast at 2.9 percent in 2014 but the central bank has said the Israel-Hamas war could shave a half point off of that figure. 

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