Israel Set to Intervene as Gas Inflates Shekel: Chart of the Day

Israel’s central bank will probably intervene to weaken its currency as prospects for a natural-gas boom push up the shekel, hurting exports, I.L.S. Brokers says.

The CHART OF THE DAY shows how the shekel’s value against a currency basket used by the Bank of Israel has appreciated since the second half of 2012, indicated by the falling red line. The shekel’s gain this year breaks its correlation with moves in the extra yield Israeli assets offer over those of trading partners, in yellow, a gap that has shrunk as the central bank cut rates.

“The shekel rate appreciated sharply in recent months although the interest-rate premium narrowed,” said Modi Shafrir, chief economist at Tel Aviv-based I.L.S. Brokers. “The decorrelation is mostly due to the production of natural gas, a fact supporting renewed currency intervention.”

Bank of Israel Governor Stanley Fischer, who will step down at the end of June, is credited by some economists with helping the nation weather the world financial crisis by buying foreign currency to curb shekel strength and support exports. Reserves, which stood at $77.3 billion at the end of February, more than doubled as a result of the purchases, which ended in July 2011.

Ramzi Gabbay, head of the Israel Export Institute, called yesterday for the bank to resume currency buying after exports, making up about 40 percent of the economy, fell by an annualized 6.5 percent in the fourth quarter. Economic growth also slipped to 2.4 percent, the slowest pace in more than three years.

The shekel was the best performer in the past six months among 31 major currencies tracked by Bloomberg in the run-up to gas production at Israel’s second-largest field from March 30. Israel can’t allow its interest-rate premium to grow when that spurs capital inflows and appreciation, Fischer said March 13. The currency weakened 0.3 percent to 3.6335 a dollar at 10:27 a.m. in Tel Aviv.

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