Shekel Extends Slump on Second-Quarter Interest Rate Outlook
The shekel extended declines after the Bank of Israel held the key rate on speculation policy makers will opt to cut borrowing costs in coming months to help stem the currency’s rally to a 15-month high.
“Our base case scenario is for them to cut in early second quarter,” Mai Doan, a London-based economist at Bank of America Corp., said in a telephone interview yesterday. “They are likely maintaining a wait-and-see stance. But the risk is that the shekel stays strong and the central bank moves earlier.”
The shekel depreciated 0.2 percent to 3.7332 a dollar at 12:45 p.m. in Tel Aviv. It earlier fell to 3.7418 a dollar, the lowest since Jan. 29. The decline trimmed the gain over the past six months to 7.8 percent. The Bloomberg Israel-US Equity Index (ISRA25BN) of the largest U.S.-traded Israeli stocks lost 0.9 percent yesterday, extending its biggest decline in seven weeks. Nova Measuring Instruments Ltd. (NVMI) led the retreat, while Teva Pharmaceutical Industries Ltd. (TEVA) fell after it was reduced to hold at Argus Research Corp.
Governor Stanley Fischer and the monetary policy panel held the rate at a two-year low of 1.75 percent, saying a rise in house prices balanced slowing growth and inflation. Fischer warned on Feb. 13 that the central bank was “going to have to watch” foreign inflows after the currency appreciated this month to the strongest level since November 2011.
The Bloomberg Israel-US index fell to 86.74 yesterday, its lowest level since Feb. 4. Israel’s benchmark TA-25 (TA-25) Index today slipped 0.6 percent to 1,213.81.
The yield on the 4.25 percent government notes due March 2023 today fell three basis points, or 0.03 percentage point, to 3.97 percent.
Ten of the 22 economists surveyed by Bloomberg forecast the decision, while the remainder predicted a quarter-point reduction. In light of “mixed” indicators of economic activity, the central bank concluded it was “too early” to assess whether the economy has staged a turnaround, according to a statement yesterday.
Fischer, who announced last month that he would step down at the end of June after eight years at the helm, told reporters in Jerusalem on Feb. 13 that more “expansionary” policies in advanced economies have led to capital inflow to Israel and caused the shekel to rise. He praised the Swiss National Bank on Feb. 7 for successfully stemming the franc’s rally, saying policy makers can “fight the market.”
One-year interest-rate swaps, an indicator of investor expectations for rates over the period, dropped one basis pointtoday, or 0.01 percentage points, to 1.51 percent. It remains below the benchmark borrowing costs, suggesting traders are still betting that policy makers will lower the rate.
The central bank has gradually reduced the borrowing rate from 3.25 percent in 2011 in an effort to boost economic growth.
Israel’s gross domestic product growth eased to an annualized 2.5 percent in the fourth quarter, the slowest since the second quarter of 2009. Exports fell an annualized 6.5 percent last quarter amid the debt crisis in Europe, the destination for 34 percent of Israel’s goods.
“I don’t think they’ve closed the door for rate cuts,” Gaelle Blanchard, an emerging-markets strategist at Societe Generale SA in London, said in a telephone interview. “They’d like to keep ammunition for later if necessary, especially if the shekel strengthens too much.”
Inflation slowed to 1.5 percent in January, below the 1.6 percent median estimate of 11 economists surveyed by Bloomberg. The government’s target range is 1 percent to 3 percent.
Nova Measuring was the worst performer on the Bloomberg Israel-US traded gauge, dropping 3.4 percent to $8.71, the lowest price since Jan. 17. Thirty-day volatility on the Ness- Ziona, Israel-based developer of measurement systems for the semiconductor industry was at 39.8, the highest level since Sept. 6. Shares of Nova traded in Tel Aviv today added 1.8 percent to 33 shekels, or the equivalent of $8.84.
Teva, the world’s largest maker of generic drugs, lost 1.3 percent to $37.58 on a fourth day of declines. Argus Research cut the Petach Tikva, Israel-based company to hold from buy. Shares traded in Tel Aviv this morning lost 0.5 percent to 141.4 shekels, or $37.87.
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