In recent weeks, we have experienced a sharp devaluation of about 6% in the shekel against the dollar, with the Israeli currency trading at about NIS 3.11 to the dollar on January 14, closing the last trading week at the level of NIS 3.3 to the dollar.
Behind the relatively unusual devaluation is first and foremost the increase in the Bank of Israel’s involvement in the local foreign exchange market, after announcing on 14/1/2021 its intention to purchase $ 30 billion this year. The volume of such annual purchases constitutes an increase of about 50% in the foreign currency purchases of the local bank compared to its corresponding purchases last year. Already in the first two months of 2021, the Central Bank purchased about $ 11.7 billion, bringing the Bank of Israel’s foreign exchange reserves to about $ 185 billion and driving a sharp change in the foreign exchange market.
The relatively aggressive action of the Bank of Israel has had a parallel strengthening effect of the dollar index (which is an acceptable measure of the strength of the dollar relative to the US major currency basket) by about 2.7% during this period. I will note that even after the recent rise in the index, The corona crisis collapsed the dollar index by about 10%, a collapse that contributed in the chain to the accelerated appreciation of the shekel against the dollar during 2020.
The particular recovery in the dollar index in recent weeks is a result of the expectation of a first US interest rate hike as early as the end of 2022, compared to an earlier forecast for an interest rate hike only by the end of 2024. , Leading to a stronger dollar in the world on the assumption that in the not-too-distant future it will be possible to earn higher interest rates on a dollar investment.
The financial markets are not impressed by Fed officials’ statements that the incentives are not expected to decrease in the foreseeable future and assume that economic reality will dictate monetary policy to the Fed. The improved employment data released in the United States last Friday illustrates, on the one hand, the substantial economic recovery in the United States, and on the other hand shows that the US economy is still missing 9.5 million jobs in order to return to employment on the eve of the corona, ignoring population growth.
In my opinion, expectations of raising interest rates in the US as early as next year, along with estimates of a reduction in the Fed’s incentives in the foreseeable future, will not materialize, as the US and its central bank cannot afford a substantial increase in debt financing. While the national debt itself piled up in larger piles than ever.
Moreover, I estimate the global dollar index will weaken again as investors internalize that the Fed is determined to keep interest rates low and launch additional support programs as needed.
The $ 1.9 trillion fiscal stimulus program promoted by the Biden administration is a sure recipe for a weakening dollar as it is a program that is expected to be only partially funded by taxation.
The assessment of the multi-year trend in the exchange rate of the shekel against the dollar is critical for Israeli exports, but it also has a significant effect on savings performance in Israel.
Institutional investors, as well as the private investor public in Israel, have in recent years increased their exposure to investing in foreign assets, most of which are denominated in dollars.
The appreciation of the shekel against the dollar constitutes a built-in tax on the denominated investments of the dollar. The phenomenal returns of dollar investments in recent years have made the damages of investing in the dollar a small blow on the wing of investors. If in the stock market an annual increase of a few percent is a seemingly tolerable price, then in the bond market denominated in foreign currency, such an increase is a severe blow to the incentive for these investments.
In Israel, there are a variety of mutual funds that hedge exposure to foreign currency, and these solutions are tailor-made for the Israeli investor, who cannot hedge currency exposure independently but wants to minimize additional damage.
The strength of the shekel is not accidental and is the result of fundamental factors that have supported the local currency in the past and are expected to support it in the future as well.
The large current account surplus, large and large direct investments in Israel, growing foreign exchange hedging of institutions accumulating many new investments and an increase in investments by foreign investors in the Israeli government bond market, are not a transient phenomenon and are at the core of the shekel.
The Bank of Israel’s activity in the currency arena is to buy time for investors to internalize market conditions in the currency arena and minimize excess exposure to the dollar.
I understand that anyone who buys in shekels at the grocery store and does not have dollar liabilities of any kind, should consider a re-route in all that is said in his exposure to the dollar and avoid unnecessary damages and expensive speculation resulting from this exposure, since the dollar is not an independent investment channel.
It is quite possible that at the current point in time the devaluation will be seen as a response to global economic developments and the intervention of the Bank of Israel. Just as it is wrong to plan the umbrella and winter clothing business for rainy June years, so it is also a mistake to bury our heads in the Middle East sand and ignore the fact that the main economic scenario was and remains a strong and strengthening shekel.