Has the Bank of Israel succeeded in calming the turbulent foreign exchange market and stabilizing the dollar at a rate of about NIS 3.23? This was the case on Friday, yesterday and also today (Tuesday), when the representative rate was set at NIS 3.2320.
Last Thursday afternoon, Israel announced in advance, surprisingly, that it would purchase $ 30 billion in the foreign exchange market in 2021. Its announcement immediately led to a significant rise in the dollar, until it reached a low of NIS 3.1130 to close to NIS 3.30 at the continuous rate.
Shekel dollars
(Photo: Shatterstock)
However, already yesterday the dollar stabilized and even recorded a slight decline compared to its exchange rate on Friday. The representative price dropped to NIS 3.22270 compared to 2.2310 on Friday. Today the dollar rose very slightly compared to the representative rate yesterday.
Estimates in the Israeli economy were that the Bank of Israel’s announcement would cause the dollar to rise to around NIS 3.35 to 3.40 during the month. However, as mentioned, the gate started to go down yesterday and has stabilized in the meantime today. This is due to the flooding of the market with dollars resulting from investors’ money to buy bonds in shekels, converting dollars and euros to shekels by companies that paid tax advances in the middle of the month and had to pay bills such as electricity, water and property taxes in shekels. In addition, the tight closure almost completely prevents Israelis from going abroad and they refrain from purchasing dollars.
A special review by one of Europe’s largest and most influential banks, Deutsche Bank, said on Sunday that “in a tactical move by the Bank of Israel, it announced a change in its intervention policy in the foreign exchange market, in order to eradicate the negative effects of the strengthening of the shekel on the Israeli export sector.” . We see the change in policy as significant and think that Long Dollar’s position against the shekel is correct. We believe that the dollar will strengthen to a rate of NIS 3.40 per dollar. “
Investment houses and banks also estimated that the dollar exchange rate would continue to climb, after rising from a 25-year low of NIS 3.1130 to 25.31 on Thursday afternoon. Beyond that, as mentioned, in continuous trading the gate even approached NIS 3.30 for a short time, on Friday at noon.
President of the Manufacturers’ Association at the Ynet studio
(Photo: Avi Chai)
In order to try and calm the foreign exchange market and stop the dollar from falling to a new low later this year, the Bank of Israel announced on Thursday that it will purchase $ 30 billion in 2021, as stated. In 2020, the central bank purchased $ 21 billion, but the dollar exchange rate collapsed.
With these acquisitions, the Bank of Israel’s balances will rise to an unprecedented amount of more than $ 200 billion, compared to the $ 173 billion that are the balances today.
The Bank of Israel explained that the advance announcement of the volume of acquisitions is intended to provide the market with certainty about the Bank’s commitment to dealing with the recent sharp appreciation, thus supporting the economy’s continued to deal with the economic consequences of the corona crisis.
In recent months, the inflows of foreign currency entering the Israeli economy have intensified, against the background of the increase in current account surpluses, direct investments, high-volume foreign exchange sales made by institutional investors against the profits of their investments in capital markets abroad, and increased foreign investment in government bonds Israel, also as a result of Israel joining the global bond index WGBI.
These factors contributed to a significant appreciation of the shekel, which was also affected by the weakening of the dollar in the world, against the currencies of many other countries. Against this background, and in order to mitigate the negative effect of the appreciation of the shekel on economic activity in the Israeli economy during the corona crisis, the Bank of Israel increased the scope of intervention in the foreign exchange market and purchased approximately $ 21 billion in 2020.
The Monetary Committee estimates that in order to support the achievement of the Bank of Israel’s goals and the recovery of the economy from the corona crisis, and in particular to support the export industries and import substitutes, it will be necessary to continue to intervene in the foreign exchange market extensively in 2021.
Following a series of discussions in recent days, and in order to increase certainty about the Bank of Israel’s involvement in the foreign exchange market in the coming year, the Monetary Committee decided on a change in foreign exchange market policy.
A sum of $ 30 billion in 2021 is a significantly larger amount than the Bank’s intervention in the past and the Bank’s estimates of the expected current account surplus this year, so that the acquisitions will also moderate the stabilizing forces arising from financial factors.
Acquisitions will continue as long as they do not result in a devaluation of an inconsistent magnitude with the achievement of the Bank’s targets in the area of price stability and financial stability.
Towards the end of 2021, the Bank will announce the intervention policy in 2022, in line with developments in the real economy and the labor market in particular, in the financial markets, and in the inflation trend, and with regard to estimates of the exit route of the economy.