Shekel Volatility Jumps as Brexit Fear Compounds Slowing Growth

  • Israel currency has worst carry trade among EMEA peers in June
  • Central bank wants to weaken shekel to help stoke growth

A measure of expected swings in the Israeli shekel is headed for the biggest monthly jump since August as concern over the country’s slowing economy is compounded by fears the U.K. may vote to leave the European Union.

Three-month implied volatility in the currency climbed 40 basis points this month to 7.5 percent, data compiled by Bloomberg show. That’s the largest increase in 10 months and follows a rise in May after data showed the country’s $296 billion economy posted the slowest first-quarter growth since 2009. Meanwhile so-called Brexit risk has already driven up volatility for a host of currencies including the pound and euro.

The increased expectations for swings underscore the competing pressures on the shekel. The currency has traded at a record high against a basket as the pace of foreign investments into Israeli companies rose, prompting the Bank of Israel in May to buy the most dollars this year in a bid to lend momentum to a selloff. The central bank wants to help boost slowing exports, which contribute a third of the country’s economy. Britain, Israel’s third-largest trade partner according to Finance Ministry data, will vote on its European future on Thursday.

“Some investors are hedging against shekel depreciation after a bunch of weak local economic data and because of the Brexit risk,” said Guy Hanan, the Tel Aviv-based head of foreign exchange and interest-rate options at Bank Leumi Le-Israel Ltd., the country’s second-biggest lender. “I don’t see any panic though, and if the shekel-dollar exchange rate doesn’t break the 3.70 to 3.90 range we will probably see volatility coming back down.”

The shekel is the worst performer this month after the Mexican Peso and the Indian rupee among 31 major currencies tracked by Bloomberg, and is little changed at 3.8525 per dollar at 3:44 p.m. in Tel Aviv. Investors borrowing dollars and investing in the shekel didn’t get a return this month, the worst-performing carry trade in Europe, the Middle East and Africa.

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