Options Show World-Beating Shekel to Give Back: Israel Markets
The shekel’s best days may be over as the government and central bank step up efforts to weaken the world’s best-performing major currency last year.
There’s a 59 percent probability the shekel will give back half of the past year’s advance by the end of 2014, options data compiled by Bloomberg show. The shekel recorded its biggest monthly drop since August last month, with the Bank of Israel and the Finance Ministry buying about $1.5 billion in foreign currency, according to Rony Gitlin, head of spot trading at Bank Leumi Le-Israel Ltd., the country’s second-largest bank.
“The central bank, with some help from the Finance Ministry, is succeeding in halting shekel appreciation by more aggressively intervening in the market,” Leumi’s Gitlin said in a phone interview from Tel Aviv on Jan. 29. “Frequent interventions signal the determination by the bank to act to balance the exchange rate so it’s not hurting exports as much.”
Israel’s exporters expect to double job cuts this year as the currency’s strength eats into profits. The efforts to weaken the shekel coincide with a rout of emerging market currencies after Chinese manufacturing growth slowed, and amid social unrest in Ukraine and investor concerns about Turkish monetary policy.
There’s a 59 percent chance the currency will weaken 3.75 percent to 3.6551 shekels per dollar by the end of this year, implied volatility from options trading monitored by Bloomberg showed. The shekel weakened 0.3 percent to 3.5275 a dollar at 4:16 p.m. in New York.
The shekel appreciated 7.5 percent in 2013, the biggest advance among 31 major currencies tracked by Bloomberg. Prime Minister Benjamin Netanyahu said Jan. 24 that while the government and the central bank were considering a “few things” they can do to tame the shekel, exporters must adjust to the stronger currency. The comments come as manufacturers urged the Bank of Israel to cut borrowing costs and increase foreign currency purchases.
Sales abroad of goods and services, which account for about a third of Israel’s $273 billion economy, declined 0.1 percent last year after rising 0.9 percent in 2012. The economy expanded 3.3 percent in 2013 compared with 3.4 percent the previous year.
Morgan Stanley said in a Jan. 24 note it has the most confidence in the currency as a haven within emerging markets because of Israel’s “resilient” economy and “strong” external balance sheet.
A Bloomberg gauge tracking 20 emerging-market currencies last week fell to the lowest level since April 2009. The central banks of India, Turkey and South Africa have all raised interest rates to defend their tumbling currencies.
Since the Bank of Israel’s last interest-rate cut in September the shekel strengthened 0.5 percent against the dollar. While that was the least among 31 major currencies tracked by Bloomberg, some traders are betting rates may move lower in coming months. One-year interest rate swaps, an indicator for expected interest rates over the period, fell to a one-month low of 0.875 percent on Jan. 24. The central bank kept the benchmark rate at 1 percent for a fourth month last week.
“If the shekel appreciates in coming weeks, the Bank of Israel may need to cut its rate in one of its forthcoming decisions,” Ori Greenfeld, an economist at Tel Aviv-based Psagot Investment House Ltd., said by phone on Jan. 29. “The bank could also speed up foreign exchange purchases or introduce taxation to trim shekel appreciation.”
Israel’s central bank said it will buy $3.5 billion in foreign currency this year to offset the effect of new natural gas revenue on the shekel, a 67 percent increase from 2013.
Since Bank of Israel Governor Karnit Flug earlier this month said the central bank isn’t indifferent to developments in the exchange rate, the bank has been more engaged in foreign currency buying. Also, currency hedging by the Finance Ministry totaled $340 million in the first two weeks of the year compared with $100 million in November.
“The Bank of Israel will continue to use ad-hoc foreign exchange interventions to limit appreciation pressures,” Goldman Sachs Group Inc. strategists Kasper Lund-Jensen and Ahmet Akarli said in a note Jan. 27.
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