Israel: Shekel seesaws as rapid appreciation is met with Central Bank intervention
The Israeli shekel has been on a rollercoaster ride in recent weeks, first appreciating from roughly ILS 3.40 per USD in early November to ILS 3.12 by mid-January—the strongest reading in over two decades—before weakening notably after the Central Bank (BoI) announced its intention to purchase USD 30 billion this year. More recently, on 5 February the currency traded at ILS 3.29 per USD, 2.5% weaker month-on-month. The reading marked a 2.2% depreciation year-to-date, but the currency was still 5.1% stronger year-on-year.
The marked appreciation of the shekel last year and into early 2021 was likely influenced by the country’s large current account surplus, improved global risk sentiment following the U.S. elections, investor inflows into the tech sector and government bonds, and more recently the rapid domestic vaccination rate.
While the Central Bank’s announcement led to an immediate depreciation of the shekel, our panelists do not see this trend being sustained, and expect the currency to strengthen by year-end. The fundamental factors which have boosted the shekel in recent months will likely persist, while the Bank’s purchases could be insufficient—it already bought USD 21 billion in foreign currency last year to limited effect. That said, the shekel should remain weaker than January’s low, with the possibility of additional FX buying if sharp appreciation pressures resume.
According to analysts at Goldman Sachs:
“The shekel’s appreciation is underpinned by strongly supportive macroeconomic fundamentals—the strength of its balance of payments situation, improvements in its terms of trade and, more recently, positive news on the speed of its vaccine roll-out. Counteracting this support is likely to require a substantial policy response. [Moreover] it is not clear that the actions announced by the BoI are as decisive as the raw numbers imply: the BoI currently sterilizes its FX interventions (i.e., it withdraws the excess shekel liquidity that its interventions create), a policy that ultimately reduces the effectiveness of its FX purchases.”