Shekel Forecasters Tip Fischer Victory: Israel Overnight

Israel’s central bank needs to follow yesterday’s surprise interest rate cut and dollar purchase plan with more measures to succeed in stemming the shekel’s gains, the currency’s most accurate forecasters say.

“The Bank of Israel will have to do more intervention, more capital controls, more of everything to weaken the shekel,” said Daniel Hewitt, a senior economist on emerging Europe, Middle East and Africa at Barclays Plc, which had the second-most accurate forecasts on the shekel last quarter, according to data compiled by Bloomberg. “It’s going to have a big fight on its hands and over the long term or medium term, the Bank of Israel’s going to win.”

The shekel retreated 1.2 percent yesterday, the biggest one-day drop since August, after policy makers led by Bank of Israel Governor Stanley Fischer unexpectedly reduced the benchmark lending rate by 25 basis points and pledged to buy about $2.1 billion by the end of the year. The currency strengthened this year as the start of natural gas production and rates more than double the U.S.’s lured investors.

The currency weakened another 0.8 percent to 3.6444 a dollar at 9:43 a.m. in New York, trimming this year’s advance to

2.5 percent, the second-biggest after Mexico’s peso among the 31 most-traded currencies.

Accurate Forecaster

The Bloomberg Israel-US Equity Index of the largest Israeli companies traded in New York fell 0.9 percent yesterday after Tel Aviv’s benchmark TA-25 Index posted the biggest gain in three months. Cellcom Israel Ltd., the nation’s largest mobile phone provider, slumped in New York after posting a 21 percent drop in first-quarter sales.

The Bank of Israel started buying dollars in April for the first time in two years to arrest the shekel’s climb and bolster exports, which make up about 40 percent of Israel’s economy. Borrowing costs in Israel aren’t “low enough” to deter foreign capital, Governor Fischer, 69, told a conference in Tel Aviv April 23. The country’s 1.5 percent rate compares with 0.5 percent or lower in the U.S., Japan, U.K. and the euro region.

The Bank of Israel will cut rates to 1 percent or lower, engage in quantitative easing or “unsterilized intervention,” according to Olgay Buyukkayali, the most accurate shekel forecaster in the first quarter, Bloomberg data show. The London-based strategist at Nomura Holdings Inc. also wrote in a report yesterday that the bank’s action “does not justify shorting shekels.”

‘Strong Sign’

Nomura scored 75.49 out of 100 based on the accuracy, timing and directional precision of its prediction in the period, according to data compiled by Bloomberg. Barclays’ score was 67, while Societe Generale SA scored 64.34.

Barclays’s Hewitt said by phone yesterday that the shekel will trade around 3.60 a dollar in the second quarter. Nomura sees it strengthening to 3.60, while Societe Generale’s Guillaume Salomon said that 3.64 versus the dollar is the highest the shekel will go.

“We have seen the lows of the year in the dollar-shekel,” Guillaume Salomon, chief emerging-markets strategist at Societe Generale in London, said by phone yesterday. “It’s a strong sign to the market participants that the central bank has said the currency’s strength is enough and we’ll do anything to turn the trend.”

Appreciation Potential

The Israeli shekel will depreciate 1 percent to 3.65 in the second quarter, according to the mean of 12 forecasts compiled by Bloomberg.

“Our view is that we don’t think that this turns around the outlook for the shekel, we think it slows the appreciation potential,” Anezka Christovova, a foreign-exchange strategist at Credit Suisse AG in London, said by phone yesterday. Credit Suisse is in the process of reviewing her foreign-exchange forecast for the shekel versus the dollar, she said.

The shekel’s appreciation, the start of natural gas production from the Tamar field and interest rate cuts by regulators, including the European Central Bank, were cited by the Bank of Israel among reasons for yesterday’s decisions.

Of 11 economists surveyed by Bloomberg prior to the rate decision, only Shlomo Maoz, of Ramat Gan, Israel-based Alfa Platinum Investment House and Modi Shafrir of Tel Aviv-based I.L.S. Brokers Ltd., predicted a cut to 1.50 percent. The median estimate was for rates to remain unchanged at 1.75 percent.

Stepping Down

The central bank move came a little more than a month before Fischer plans to step down. The former No. 2 at the International Monetary Fund said he was leaving for personal reasons, mostly because his family is in the U.S. and he has achieved many of the goals he wanted to accomplish.

“This is Fischer’s last stand,” John Taylor, chief executive officer of FX Concepts LLC, said yesterday at Bloomberg headquarters in New York. His firm manages $1 billion in currency funds. “We’re short euros and long shekels, and this didn’t help that position at all today. I think we’d like to be long shekels against the euro anyway.”

Israel’s benchmark TA-25 Index advanced 1 percent, the most since Feb. 20, to 1,204.66 yesterday. The Bloomberg Israel-US Equity Index slipped to 91.41, led by Cellcom.

Israel’s biggest mobile provider plummeted 6.6 percent, the most since October, to $8.90, after reporting first-quarter sales that declined to 1.26 billion shekels ($349 million). Shares of Netanya, Israel-based Cellcom slipped for a third straight day, dropping 2.4 percent in Tel Aviv trading to 32.75 shekels, or $9.06.

Ituran Location and Control Ltd. added 1.9 percent to $16.67, a two-year high. The Israeli manufacturer of devices for locating stolen vehicles posted a record 684,000 net subscribers, helping sales increase 8.6 percent to $41 million, according to a statement yesterday. Shares in Tel Aviv gained 4 percent to 60.20 shekels, or $16.66. Co-Chief Executive Officer Eyal Sheratzky said the Azur, Israel-based company sees a stronger shekel having only a small effect.

“We’re mostly not having an exposure because in every region, our costs and revenue are in local currencies,” Sheratzky said by phone yesterday.

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