Knocking Shekel Off Track May Be More Than $30 Billion Problem

(Bloomberg) -- The Bank of Israel’s pledge to buy an unprecedented $30 billion to weaken the shekel might not be enough to do the trick.

From a current-account surplus to record technology investment and increased natural-gas exports, the backdrop is favorable to currency appreciation. A global recovery from the coronavirus crisis, rising stock markets and a weakening dollar are expected to only further buttress a currency that was a top global performer last year.

Analysts at Goldman Sachs Group Inc. are leaving their 12-month forecast at 3.2 shekels to the dollar, which would be a quarter-century record high. “We would not take the other side of the Bank of Israel at this point, but rather note that shekel appreciation pressures reflect underlying fundamental factors,” they said in a report over the weekend.

After a banner year in 2020, the shekel caught fire this month, boosted by optimism over Israel’s world-leading vaccination drive. It beat all other expanded major currencies through Jan. 13, sending shudders through the tech and export sectors, whose bottom lines would be hurt by the appreciation.

With inflation negative since April, central bankers were also worried about the potential impact of the currency’s appreciation on prices. On Thursday, they announced they would step up foreign-currency purchases beyond last year’s unusually large $21.2 billion to stop the shekel’s gains.

A near-zero interest rate and a flurry of stimulus programs rolled out during the coronavirus pandemic have left the Bank of Israel with depleted ammunition, putting a focus on currency buying as the main tool for influencing the exchange rate.

The surprise move sent the currency sinking 4.3% against the dollar in two days. The Manufacturers Association of Israel, which had called for more help from the central bank, hailed the measure, which was unconventional in both approach and scope.

Joseph Gagnon, an exchange-rate scholar at the Peterson Institute for International Economics in Washington, said targeting an intervention amount might be more successful than aiming for an exchange rate. Central bankers in Poland and Switzerland also have stepped up intervention in currency markets in recent months to limit gains.

Read more: Why Israel Tries, and Fails, to Slow Its Roaring Currency

But by Monday, the big moves had evaporated. The shekel erased some of its loss, though on Tuesday it was trading 0.6% weaker, at 3.2498 to the dollar at 5:33 p.m. in Tel Aviv.

Many people held short dollar-shekel positions and were squeezed out, said Credit Suisse Group AG analyst Nimrod Mevorach. Investors may have realized the Bank of Israel “was not necessarily intending to take the shekel much weaker on a sustained basis but more to draw a line in the sand,” Mevorach said.

Guy Beit-Or, head of macro research at Psagot Investment House, predicts that a year from now, the shekel will be at the current rate or stronger.

“Now the move is fully priced in and the regular market dynamics will continue to exert more appreciation pressures on the shekel moving forward, as long as global equities will continue to rise and the dollar will weaken,” he said.