Israel’s efforts to curb the shekel’s world-beating advance and make the Middle Eastern nation more competitive are finally winning the support of currency traders.
Bearish bets on the shekel rose to the highest in 2 1/2 months in the options market, while the difference between three-month and one-year expected volatility was the widest since May, implying losses. The shekel strengthened 6 percent against the dollar this year, the most among 31 major currencies tracked by Bloomberg.
The Bank of Israel bought $4.5 billion of foreign currency since April and cut interest rates to stem these gains, spurred by the start of natural gas production off the Mediterranean coast. Now, traders are awaiting details of a collaboration between policy makers and the government after Finance Minister Yair Lapid said in October he’d work with BOI Governor Karnit Flug to damp the currency’s effect on exporters.
“You don’t want to be up against a credible governor who’s keen to maintain a competitive currency, not necessarily via more rate cuts but through active intervention,” Jonathan Katz, a Jerusalem-based economist at HSBC Holdings Plc, said by phone on Dec. 1. He said he’s “neutral” on the shekel.
The shekel climbed to 3.4817 per dollar on Sept. 19, the strongest level since August 2011, and was at 3.5232 at 10:57 a.m. in Tel Aviv, data compiled by Bloomberg show. The Israeli currency is about 9 percent off its level of 3.2024 in September 2008, which was the strongest since 1996.
Traders paid 1.61 percentage points more for three-month options to buy the dollar versus the shekel over contracts for sales on Nov. 26, the biggest premium since Sept. 11, data compiled by Bloomberg show. The 25-delta risk-reversal rate rose from a seven-month low of 1.19 percentage points on Nov. 15 and was at 1.55 today.
“The currency’s short-term risk reversal rate remains fairly high, signaling that investors don’t expect sharp shekel gains in coming months,” Modi Shafrir, the chief strategist of Mizrahi Tefahot Bank Ltd.’s finance division, said by phone on Dec. 2. “This sentiment is supported by bets the finance ministry and the Bank of Israel will take increased steps to weaken the shekel in the near future.”
A measure of future price swings signals that the currency may be poised for a decline versus the dollar.
The spread between one-year and three-month implied volatility rose to 0.83 percentage point yesterday, from minus 0.42 on Sept. 5. When the spread moved to a peak from a negative in the nine months leading up to May 2012, Israel’s currency went on to weaken about 8 percent, according to data compiled by Bloomberg.
Flug, who succeeded Stanley Fischer as governor of the BOI in October, will preside over a 67 percent increase in the bank’s dollar purchases to $3.5 billion next year to offset the effects of gas production.
The central bank bought $620 million in October, of which $320 million was specifically to counter shekel gains from pumping gas and the rest was impromptu intervention. On top of that, the government said it conducted hedging transactions worth $850 million in recent months to protect its foreign-currency debt from fluctuations in the dollar-shekel rate.
The BOI has reduced its base lending rate by 0.75 percentage point this year to a four-year low of 1 percent to boost growth. (ISGSANYY) Flug said in a Nov. 19 speech that a “standstill” in exports had contributed to “disappointing” economic expansion of 2.2 percent in the third quarter. Growth still matches the global average for last year. Exports, which account for 34 percent of Israel’s gross domestic product, shrank 16 percent in the three months to September after advancing in the first two quarters, official data show.
“The central bank has in recent months been more downbeat on economic data, and we’re starting to see a shift in sentiment,” Joel Kruger, the Tel Aviv-based founder and chief strategist of research and trading firm FirstMacro, said by phone on Nov. 27.
Israeli authorities have also been stymied in their efforts to depreciate the shekel by foreign investment in the nation’s companies, which reached $9 billion in the first nine months of the year, matching the total for 2012, central bank data show. With the most startup firms per capita of any country in the world, cash is pouring into Israel as investors from Google Inc. to Cisco Systems Inc. buy local companies.
“Renewed concerns about foreign-exchange strength accentuates the risk of a dovish bias and verbal intervention,” Benoit Anne, the head of emerging-market strategy at Societe Generale SA in London, wrote in a Nov. 25 client note. “The balance of risks is skewed toward a weaker currency.”