Shekel Rises to 5-Month High as Israel Ratings Boost Risk Demand

Israel’s shekel strengthened to the highest in more than five months as investors shifted their focus to riskier assets after the nation’s sovereign ratings were affirmed.

The shekel gained 0.4 percent to 3.7976 a dollar at 4:56 p.m. in Tel Aviv, the highest since May 7, as the U.S. dollar fell against 15 of 16 major currencies tracked by Bloomberg. The yield on the 5.5 percent Mimshal Shiklit bonds due in January 2022 rose for the first time since Oct. 9, gaining three basis points, or 0.03 percentage point, to 4.14 percent.

Standard & Poor’s affirmed Israel at A+, the fifth-highest investment grade, saying that austerity measures and current growth levels outweighed concern about fiscal risks. The currency also gained after Spain kept its Baa3 rating, one step above junk, at Moody’s Investors Service as the ratings company cited reduced risk of losing market access because of the European Central Bank’s willingness to buy the nation’s debt. About 40 percent of Israel’s gross domestic product is made up of exports, with Europe and the U.S. among the largest markets.

“Israel’s rating affirmation adds to the country’s economic stability bringing back foreigners to investing in the local currency,” said Eytan Admoni, head of the international department at Bank of Jerusalem Ltd. “The risk-on sentiment is also supported by expectations that measures for Spain will better Europe’s debt crisis, which in turn will help keep Israel’s economy buoyant.”

Inflation Forecast

The implied volatility on three-month options for the shekel versus the dollar, which reflects traders’ expectations of currency fluctuations over the next three months, declined six basis points to 7.68 percent.

Economists’ 12-month inflation expectations fell to 2 percent on average from 2.6 percent the previous month, a central bank survey showed today. Annual inflation accelerated to 2.1 percent in September from 1.9 percent a month earlier, the Central Bureau of Statistics said Oct. 15.

The two-year break-even rate, the yield difference between the inflation-linked bond and fixed-rate government bonds of similar maturity, fell four basis points to 253, implying an average annual inflation rate of 2.53 percent.

Economic growth is expected to slow to 3.3 percent this year from 4.6 percent in 2011, according to central bank estimates, as Europe struggles with its debt crisis and global expansion slows.

One-year interest rate swaps, an indicator of investor expectations for the benchmark rate in the period, rose three basis points to 2.15 percent. The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, was little changed at 275.39.

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