Deutsche Bank Says Sell the Shekel on Expected Move by Flug

  • Israeli currency is third-best performer in past 12 months
  • Bank of Israel may need to cut rates, Deutsche Bank says

Deutsche Bank AG, the world’s second-biggest foreign-exchange trader, recommended selling the Israeli shekel as the currency traded near its strongest level since December.

Central bank Governor Karnit Flug will have to step up foreign-currency purchases or reduce record-low interest rates to tame further appreciation in the local currency, shore up exports and defend against deflation, according to Gautam Kalani, a strategist at Deutsche Bank.

“The Bank of Israel is behind the curve and a rate cut to negative is therefore a realistic possibility,” Kalani said in an e-mailed note. “Whichever path it follows, the Bank of Israel will do enough to ensure that the end result is a weaker shekel.”

The currency, the third-best performer in the past 12 months among 31 major peers tracked by Bloomberg, has become an investors’ haven amid global market turmoil. Israel’s economic growth prospects have improved and the nation has narrowed its budget deficit. Foreign investment by companies such as Apple Inc. and potential exports of natural gas have also bolstered the shekel.

Deutsche Bank believes speculation about additional monetary easing and increased foreign-currency purchases by the central bank may help weaken the shekel to 3.95 per dollar in the near term and to 4 in the coming months. The currency weakened 0.4 percent to 3.8854 at 5:30 p.m. in Tel Aviv, near a level of 3.8655 that was the strongest on a closing basis since Dec. 14.

Appreciating Currency

Data show currency traders are doubting that the steps taken until now by the Bank of Israel will be able to weaken the shekel. The one-month 25-delta risk reversal rate, a cost of options that protect against shekel declines versus the dollar, was at 0.2875, the lowest since Jan. 14 on a closing basis.

Meanwhile, technical indicators suggest that the shekel’s gains may be overdone. Its 14-day relative strength index was at 40 on Wednesday. A 30 threshold indicates to some investors that a reversal is imminent.

The Bank of Israel, which has left its base rate at 0.10 percent since February 2015, holds its next interest rate decision on Feb. 22. All 13 economists surveyed by Bloomberg predict no change.

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