(Bloomberg) — The shekel regained its stability as the central bank enticed short sellers to prevent market repercussions from Israel’s conflict with extremist group Hamas.Thank you for reading this post, don't forget to subscribe!
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In the first thirty minutes of Tuesday’s trading, the currency strengthened by 1% and remained largely unchanged against the dollar as of 4:42 pm local time. The country’s main stock index, which experienced a 6.5% decline on Sunday, rose 1.4% before reducing its gains.
The Bank of Israel’s commitment, supported by a $45 billion set of measures to control instability, succeeded in curbing speculations that there would be no advantage in the midst of any turmoil following a sell-off that caused the shekel to reach its lowest point in seven years. Gaining from it is essential. Financial stability is at risk in an economy that is susceptible to shocks as the conflict between Israel and Hamas enters its fourth day.
“I do not believe any shortfall is being established,” commented Peter Kissler, a hedge fund manager based in London at Trium Capital. “Challenging the central bank is perhaps not a wise decision.”
Traders are wary of opposing the central bank, which holds about $199 billion in reserves and has implemented an intervention program considered “unbeatable to speculators.”
Policymakers stated on Monday that they would sell up to $30 billion in reserves to support the currency. This is equivalent to its foreign currency purchases in 2021, as it aimed to control the rise of the shekel.
“Sales in US dollars should not significantly impact Israel’s solvency metrics,” wrote Murat Toprak, a strategist at HSBC Holdings Plc, in a note on Monday. “Israeli authorities possess substantial experience in intervening in the FX market.”
The cost of insuring the country’s debt against default barely changed on Tuesday, rising 34 basis points a day later to 93, the highest recorded since 2016. The shekel dropped up to 2.8% on Monday before trimming its losses.
The central bank also announced that it would provide liquidity to the market of up to $15 billion through swap agreements. In addition to possible rate hikes and expanding the range of its current intervention program, policymakers may also consider bond purchases, a measure used to support markets during the peak of the global pandemic.
Prior to Hamas’ incursion on Saturday, the central bank had been resisting support for the shekel, despite its decline due to investor concerns regarding the government’s controversial efforts to diminish the power of the judiciary.
Among a basket of 31 major currencies tracked by Bloomberg, the shekel is one of the year’s biggest losers.
According to Coex Partners Ltd., historical data suggests that the central bank may attempt to prevent the currency from further weakening beyond 4.05-4.10 against the dollar. The shekel recovered after reaching those levels in 2012 and 2015 and is presently hovering around 3.95.
“The shekel will weaken if the conflict escalates,” stated Henrik Gullberg, a macroeconomist at Coex Partners Ltd. However, “the interventionist Bank of Israel wants to prevent a significant further depreciation of the shekel.”
Despite considering the central bank’s efforts, Wells Fargo still expects the shekel exchange rate “to approach 4.15” by early 2024 as the current scenario of shock unfolds.
“We believe that a 5% shekel depreciation may still occur later this year and at the beginning of 2024,” remarked Brendan McKenna, an emerging markets strategist at Wells Fargo in New York. “Nevertheless, the risks lean towards a sharp and accelerated depreciation.”
–With the contribution of Kerim Karakaya.
(Updated with comments from Wells Fargo in the last two paragraphs)
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