“Purchases will not weaken the shekel beyond the general trend of strengthening dollar” – Forex

The extent to which the purchase of dollars by the Bank of Israel will really weaken the shekel against the dollar – this is the question that has been asked since the plan to buy $ 30 billion was announced a week and a half ago next year. Shmuel Katzbian, Discount Bank’s market strategist, returned in 2008 in search of an answer Possible, and so he writes of what he found: “The intervention then shows that increasing the volume of purchases, while committing to it, did not cause the shekel to weaken against the dollar beyond the general trend of strengthening the world dollar.”

A $ 30 billion-a-year acquisition means an average rate of $ 2.5 billion a month, and Katsbian mentions that market investors noted that if the December acquisitions did not affect the market, it is likely to continue to do so now. For him, however, there is a difference between the cases: “When the Bank of Israel announces its commitment, the impact on the market is stronger because it strengthens the perception in the markets that the Bank of Israel ‘will be in the market’ over time and not just operate in certain months.”

“The comparison to 2008 points to an interesting picture,” Katzbian writes, “We examined the trend in the dollar-shekel since closing on 7/11/08, that is, after the strong two-day strengthening following the Bank of Israel’s announcement of an increase in intervention to $ 100 million. “We performed the exam in different time sections ahead,” he explains the methodology. “On the face of it, it can be seen that the shekel has indeed weakened against the dollar, but when you compare this to the trend of the dollar in the world, you can see that the shekel has weakened almost similarly to the weakness of Western currencies in a month and a half.

However, according to Katzbian, it seems that the impact at the time of the acquisition plan is greater than what we are now expected to see: “At the time, a $ 25 billion acquisition was announced, but this was a fourfold increase in the previous announced acquisition, while this year’s announcement Only 41% of the actual purchases in 2020 “. He also points out that the background conditions of the Israeli economy are better today, especially when examining the current account surplus. Katzbian mentions that even in 2008 the Bank of Israel’s announcement did not cause the dollar to strengthen against the shekel beyond the general strengthening of the dollar.

So what’s the benefit of the purchase plan anyway? According to Katzbian, the Bank of Israel strives to restore the dynamics of dollar-shekel trading to that derived from dollar-traded and world stock prices. That is, if the dollar weakens in the world – it is likely that over time this will also be the trend against the shekel and the Bank of Israel will not try to prevent this. Will the dollar itself weaken? Discount estimates yes, and attributes the reason to Biden’s incentive plans and US Treasury Secretary Janet Yellen’s policies that will support a particularly high deficit and print money that will weigh on the dollar.

Katzbian also estimates that in the short term it is possible that the process of closing positions and updating models of various entities (especially foreign ones) will lead to continued volatility and possibly weakness of the shekel, but at some point the dollar-shekel will return to trading similar to the world dollar. “In other words,” Katzbian writes, “the announcement by the Bank of Israel will return the shekel to the main road of the connection between the world dollar and the dollar-shekel.”

Along with the predictions regarding the impact of the plan, Katzbian also explains why it was actually needed at that time. Among other things, he notes that “the shekel recorded an exceptional ‘year-on-year’ against all currencies in the world,” he explains. “From the beginning of the year until January 13, the shekel strengthened against all developed countries’ currencies by 1.5% to 4.1%. “The shekel EM strengthened by 1.9% to 6.7%. Such a situation of such a sharp strengthening of the shekel across all currencies within 13 calendar days has not been recorded in recent decades.”

“Contrary to the trend for most of last year, in 2021 the relationship between the dollar’s trading trend in the world (and especially against the euro) and the dollar-shekel broke,” notes Katzbian, adding that “the strengthening of the shekel even on days when the world stock market declined strengthened the appreciation. Due to local reasons – the rapid progress of the vaccination process in Israel (and the expected opening of the economy in the future), the reduction in the exposure of institutional forex (sold forex), and positive momentum that created a ‘herd effect’ and activated trading software that strengthened the shekel, also by Action by foreign investors. ”

As is well known, the shekel has been trading at its lowest level since 1996, and Katzbian, for his part, adds another interesting component to the equation: the level of the shekel has also broken historical extreme gaps according to various valuation models. For example, on the eve of the announcement of the purchases, the shekel was too strong by about 12% in terms of its fair value according to the purchase value.

Another model he mentions is the “short-term fair value”, where the gap reached more than 1.5% compared to the actual traded value of the dollar-shekel, which was lower. This, he emphasizes, “in contrast to the trend throughout the second half of 2020 in which the dollar-shekel traded close to its fair value and the deviation from the fair value did not exceed the threshold of 1%.”