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Israel’s Shekel Weakens as Wider Budget Deficit Boosts Rate Bets

The shekel weakened and Israel’s benchmark bond rose on speculation the central bank may lower interest rates this month after the country’s budget deficit more than doubled amid a decline in tax revenue.

The shekel lost 0.2 percent to 3.6843 per dollar at 5:38 p.m. in Tel Aviv, bringing the drop this month to 1.7 percent. The currency may weaken to 3.77 per dollar in coming weeks, according to Adiv Kabiri, senior currency dealer at Gift Asset Management Ltd. in Tel Aviv. The yield on the benchmark Mimshal Shiklit bond due January 2022 fell one basis point, or 0.01 percentage point, to 4.52 percent, the lowest since the bonds were issued in April.

“A higher deficit and lower tax revenue in October are further signs that growth in the economy is slowing down and exports are suffering from the problems in the global economy,” Kabiri said by telephone. “The deficit increases the likelihood that the Bank of Israel will cut interest rates at the end of the month.”

The central bank on Oct. 24 left its benchmark lending rate for November at 3 percent following a 25 basis-point cut the previous month, saying it has “room to respond” to events in the global and local economies. The decision was unanimously supported by the bank’s monetary policy committee, according to minutes of the rate-setting meeting released today.

The deficit widened to 4 billion shekels ($1.1 billion) in October from a revised 1.7 billion shekels a month earlier, the Finance Ministry said in an e-mailed statement today. Overall tax revenue fell 12 percent to 15.5 billion shekels, it said.

Slowing Growth

Growth may slow to about 4 percent in 2012 from an expected 4.8 percent this year as an expansion in exports eases, the ministry said Oct. 31. Exports make up about 40 percent of Israel’s economy.

Two-year interest rate swaps, an indicator of investor expectations for the benchmark in the next two years, fell five basis points to 2.72 percent, the lowest since Oct. 10. Ten analysts in a Bloomberg survey on Oct. 28 were evenly split about the course the central bank will take at its next meeting on Nov. 28 with five predicting a cut to 2.75 percent and five expecting no change to the rate.

There is a 56 percent chance the shekel will reach 3.77 by Dec. 31, according to implied probability calculated from currency options. Fourth-quarter forecasts for the shekel range from 3.40 to 3.90 a dollar, with a median estimate of 3.65, according to predictions from nine banks on Bloomberg.

Declining Demand

The Finance Ministry auctioned 1.65 billion shekels of debt at auctions today, including 250 million of the benchmark bond, the sale of which was 5.9 times oversubscribed compared with 9.7 times last week. Demand for 3.5 percent notes due August 2014 was 6.5 times the 250 million shekels offered compared with 7.6 times last week, according to data from the ministry posted on Bloomberg.

“Demand at the auction was slightly weaker compared with last week’s sale as yields have dropped,” Assaf Rosenberg, head of fixed-income sales at Excellence Nessuah Investment House Ltd. in Ramat Gan, Israel, said by telephone.

The yield on consumer price-linked notes due June 2013 increased three basis points to 0.96 percent. The two-year breakeven rate, the yield difference between the inflation-linked bond and fixed-rate government bonds of similar maturity, dropped five basis points to 182 basis points. That implies an average annual inflation rate of about 1.82 percent over the period.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, slipped 0.2 percent.

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