Currency Slide Israel Spent Billions Chasing Is Here at Last

Updated on
  • The shekel ended its longest monthly rising streak since 2006
  • Tide shifted after Deutsche analyst recommeded shorting shekel

The bears are coming out for Israel’s shekel, ending a rally the central bank spent billions of dollars trying to curb.

The currency weakened in July for the first time this year, interrupting its longest monthly rising streak in more than a decade, with option contracts signaling the decline isn’t over. Deutsche Bank AG’s Gautam Kalani on July 3 recommended shorting the shekel, the day it peaked to a record against a basket of currencies.

“The exchange rate has gone far beyond its fair value,” the London-based emerging market strategist said in an interview on Monday. “Over this year, the performance of the shekel has been so strong that it’s led to more and more momentum creators as speculators piled up on the trade.”

The Bank of Israel, concerned about the export sector, has repeatedly said the shekel is overvalued. It has spent about $6 billion so far this year trying to stem its gain and its reserves have grown by some $10 billion in all, the most since 2009 on a year-to-date basis. But traders continued to pile into the currency, encouraged by a current-account surplus and inflows into high-tech and natural gas industries.

Sentiment changed after data showed consumer prices in June fell unexpectedly, days after Israel’s central bank said it won’t follow developed peers and raise its key interest rate from a record low of 0.1 percent if inflation remains subdued.

Read More: Israel Consumer Prices Unexpectedly Fall on Clothing, Transport

“Expectations have shifted,” said Jonathan Katz, a Tel Aviv-based chief strategist at Leader Capital Markets. “The June inflation numbers were very significant because people started saying, ‘the central bank clearly can’t move on rates for a very long time now.’ If many investors were expecting a hike sometime in 2018, that’s now moved to 2019 at the earliest.”

Bearishness has risen, judging by the 25-delta risk reversal, which is based on three-month options. It shows traders’ preference for shekel puts over calls jumped in July by the most in almost four years on a net basis.

The shekel’s one-month implied volatility climbed 70 basis points in July to 6.6 percent. The contracts are the only ones among the world’s currencies to rise so far this year on a net basis.

The shekel depreciated 2.1 percent in July and slipped another 0.5 percent Friday to 3.6161 per dollar as of 1:31 p.m. in Tel Aviv, its weakest level since April. It has fallen for six straight days, the longest run since October 2015.

Based on Deutsche’s valuations, which include factors such as inflation, productivity and trade, Kalani sees the currency weakening to 3.65 per dollar, without specifying a timeframe. He also predicts the central bank will step up its dollar purchases to extend the currency’s decline, but he’s still bullish on the currency’s long-term prospects.

“You had a trend with very little volatility, so it was quite attractive for speculators to jump in,” Kalani said. “Now we are at a point where the strengthening trend seems to have stopped, which will force speculators to unwind their positions, which could move the dollar-shekel higher. ”

— With assistance by Yaacov Benmeleh

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