Protracted political uncertainty weighs on shekel

The shekel is again weakening today against the dollar and against the euro. In early afternoon inter-bank trading, the shekel-dollar rate is up 0.43%, at NIS 3.683/$, and the shekel-euro rate is up 0.93%, at NIS 3.939/€. In morning inter-bank trading the shekel-dollar rate briefly touched on NIS 3.70/$.

The Bank of Israel set the representative shekel-dollar rate unchanged on Friday, at NIS 3.667/$, and the representative shekel-euro rate was set 0.51% higher at NIS 3.903/€.

Mizrahi Tefahot Bank chief markets economist Ronen Menachem told “Globes,” The shekel’s depreciation both against the dollar and against the euro stems from three strong forces.” He explains that two forces come from abroad and one force is internal, Israeli. First, Menachem believes that “sharp declines in exchange rates and a general increase in risk aversion in the world leads to a rush to safe assets at the expense of stock markets around the world.” So the whole world is turning to safer assets and this also affects the price of gold, as it will strengthen as interest rates rise.

Menachem continues: “The second reason is the sharp interest rate hike in the eurozone and the one expected on Wednesday in the US. This makes these two currencies more attractive than the shekel at this stage.”

The third and domestic factor weakening the shekel is the issue of judicial reform. Menachem said, “The outline to soften the judicial reform has met with opposition from both the right and the left, and in view of the shortening of the time until the end of the Knesset session, the likelihood of a negotiated solution decreases. This political uncertainty against the background of the continuation of the protests, works against the financial markets and sentiment and harms the desire to consume and invest – which will later weight on economic activity.”

Menachem says that added to this the security situation could worsen after Ramadan.

While forex experts disagree whether it is the external or domestic factors most weakening the shekel, Prico Risk Management and Investments CEO Yossi Fraiman insists it is the political situation in Israel most effecting the shekel. “We see the upheaval in the market because of the political crisis due to the judicial reform. The outline published today is of course not a factor and the lack of confidence of the investors indicates this.” Fraiman emphasizes that the lack of broad agreement on judicial reform is very relevant to the declines in the foreign exchange market and as soon as a compromise occurs and leads to a broad agreement we will see a real change in the markets as a result.”

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In contrast Psagot chief economist Ori Greenfeld sees oversees factors as more dominant in weakening the shekel. “The exchange rate and the stock exchanges abroad have a very high correlation.” Greenfeld explains that as the world’s stock markets fall, the shekel weakens because financial entities are interested in purchasing foreign currencies due to the changes in the relationships in their investment portfolio. Greenfeld concludes that the local influence obviously exists, but looking at the market, the explanation is that today the influence comes mainly from abroad.

Published by Globes, Israel business news – en.globes.co.il – on March 20, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.