Investors are preparing for a stronger shekel and Israeli interest-rate increases after the central bank signaled an era of falling borrowing costs may be over.
Forward-rate agreements, which are used to speculate on rate moves for the next nine months, are near the highest since February, 14 basis points above the current level. They were pricing in a cut as recently as June 3. Currency forwards project the shekel will strengthen to 3.759 per dollar in the next 12 months after they jumped the most since April on Monday.
The moves indicate a shift in sentiment in Israel, where some analysts had this year speculated that borrowing costs could be cut and that the central bank may even start buying bonds in a bid to spur inflation and tame the shekel. The Bank of Israel kept the benchmark base rate on hold at a record low of 0.1 percent on Monday, and Governor Karnit Flug said the probability of using unconventional tools to spur inflation “in the near future” has declined.
“The governor’s comments triggered a wave of shekel sales,” Moshe Shalom, the head of research at FXCM Israel in Tel Aviv, said in an e-mailed note. “The Bank of Israel will need to weigh the option of intervening in the foreign exchange market to stem shekel appreciation, which is poised to hurt the economy.”
The shekel was trading 0.1 percent stronger at 3.7686 per dollar at 5:32 p.m. in Tel Aviv. The central bank, which has reduced its benchmark rate 13 times since 2011, renewed dollar purchases in April 2013 following a two-year hiatus after production at offshore gas fields boosted national income and triggered gains in the currency.
The yield on the country’s government’s 2024 bonds jumped eight basis points to 2.32 percent, the highest level this year. It dropped eight basis points last week in the first weekly decline since May 28.
“Israeli yield curves are not properly pricing in the scenario of a rate hike and the risk in longer durations is too high,” Ori Greenfeld, chief economist at Psagot Investment House Ltd. in Tel Aviv, said in an e-mailed note.
Strength in the shekel curbs demand for Israel’s exports, which make up about a third of the $280 billion economy. Flug expressed concern over the lack of export growth, and said the shekel is overvalued.