The US Dollar over the last couple of months has shown great improvement, which is down to two factors. Firstly, improving economic data the highlight of which was released on Friday showing that unemployment decreased to 8.50% – a three year low. As a result, we have seen the US Dollar at one point hit 17 month highs against the Shekel at 3.85. Secondly, the problems with the Euro has meant investors have taken funds out of Euros and put them in to Dollars which has helped strengthen the Dollar.

Sterling went above the psychological level of 6.00 during the week but has since fallen back to 5.92. Whenever a currency wants to break a psychological level like this it finds it very tough. On three previous occasions when Sterling has tried to get through 6.00, it has hit that level and then fallen straight back. This time it went as high as 6.02 but struggled to stay above 6.00.

The Euro has continued its struggles, despite briefly revisiting a rate of 5.00 against the Shekel. Investors are concerned about the euro zone sovereign funding pressures and have fled the Euro and put their money in to Sterling or Dollars.

The Australian Dollar hit the highest rate ever against the Shekel at 3.98.  With interest rates in Israel on the decline, and interest rates in Australia remaining high it creates a greater attraction for the Australian Dollar. Don’t be surprised to see the rate go through 4.00 at some point. However, just like Sterling this may prove to be a very psychological level to break through and remain.

The Canadian Dollar also joined the party showing great improvement against the Shekel. At one point last week we saw the rate go above 3.80, for the first time since January 2008! The rate has since decreased to the low 3.70’s, which should still be considered a very good rate.

The highlights of economic data to be released this week are:

The Bank of England and European Central bank interest rate decisions and inflation figures from Germany.

Lets see if any more record-breaking rates will be achieved this week!

Have a good week

Last year the Israeli economy was growing with house prices going through the roof. Today we see an economy in decline (not as bad as the Eurozone, the UK or the US). The latest inflation figures showed the Israeli economy had contracted by 0.1% in the month of November. Latest house prices show that prices have fallen for the second consecutive month. The Bank of Israel has cut interest rates for the second time in three months, leaving them at 2.75%. This is a far cry from what we were experiencing this time last year. We were expecting a series of interest rate hikes (which did occur), house prices were growing at a very high pace and the economy was booming.
This should be of no surprise, since over the last 12 months we have seen the continued decline of the Euro, to the possible threat of extinction (or at least a Eurozone on the brink of a long and deep recession).

In terms of actual exchange rates, the Shekel is approximately 8% weaker today than it was this time last year, despite the ongoing problems with the world economy. In fact this makes perfect sense. The Israeli economy is heavily dependant on exports and is directly effected by what is happening in the world economy. House prices have also started to be affected by new rules and regulations imposed by the Israeli government which has had a knock on effect to the economy as a whole.
This time last year, the US Dollar traded at around 3.56, today it is 3.80. In fact only in the last week we saw the rate creep above 3.80 for the first time in 15 months. As fears over Europe continue, the US Dollar has benefited immensely since investors take money out of riskier assets, and put them in to the ‘safe haven’ currency – the US Dollar.
Sterling traded at 5.50 this time last year, today is trading at 5.90. The majority of this rise is due to Shekel weakness rather than Sterling strength as the UK economy is teetering on the edge of recession. It is also surprising since the UK is heavily exposed to the problems in the Eurozone.
The Euro is defying all reason and logic, this time last year it was trading at 4.70 and today 4.95. Whilst, the Shekel is certainly weaker, the Euro (in my opinion) should be a lot closer to 4.50 than where we see it today. With three new governments formed in different European countries over the last month I would have expected the Euro to be a lot weaker than it currently is.

My predictions for 2012:

1. US Dollar v Shekel rate will be at 4.00 for some part of the year.
2. Sterling v Shekel rate will be at 6.20 for some part of the year.
3. Euro v Shekel rate will go as low as 4.20 at some point during the year.

Firstly, Interest rates in Israel would go up on Monday. They duly obliged. When this was announced at 5:30 on Monday it had very little impact on the exchange rates as it was widely expected by that point. But without doubt, the effect the announcement of the new regulations had on the exchange rate allowed the Bank of Israel to put interest rates up without worrying about what could happen to the exchange rates.

The second thing I predicted in the blog post last week was that there would be taxes imposed on foreign investors at some point in the future. Now I didnt imagine that this would happen 6 days later, but it has happened. Well, at least the proposal has been made which still has to be passed in the knesset.

It is actually the ministry of finance that has today announced that it will seek to remove the tax exemption foreign investors have on any profits made on investments in Government Bonds and treasury bills. In short, foreign investors will in the future have to pay 15% tax on any profits made from Government Bands and treasury bills. Hopefully, this will drive foreign investors from speculating on the currency market and lead to a stabile and less volatile shekel.

After this announcement, the shekel weakened by about 1.5% against most major currencies.

The last two weeks have both contained surprises, I hope things become more quiet next week.

In current times, the shekel has been an attractive currency to speculate on as we have had plenty of Shekel strength as the economy grows, and the hope of big oil and gas finds.

The effect of this announcement has been a sharp decrease in the value of the shekel against all currencies. This has been much needed over the last few months as we have seen the the major currencies trading at 2 year lows against the Shekel. This has had a devastating effect on exporters, despite the huge amounts of intervention we have seen from the Bank of Israel.

I am of the opinion that this will lead to tax being imposed on speculators, which will cause a further devaluing of the Shekel.

I also believe that this announcement has been timed just before the interest rate decision in Israel on Monday. It is agreed that interest rates need to go up to help curb inflation and house prices, but the Bank of Israel were unlikely to oblige due to the poor exchange rates. Now they have helped to devalue the Shekel, I am of the opinion that interest rates will now rise on Monday evening.

It is going to be very interesting to see how this pans out.

Whilst this had a reaction in the first few hours of weakening the Shekel by approximately 0.5%, we are now back to the rates we were at before the intervention.

My question, therefore, is whether this intervention is worthwhile? Would the Dollar v Shekel rate be 3 or lower without any of the intervention we have seen over the past three years?

No one really knows the answer, but my view is as follows:

1) Yes it is worthwhile. By intervening in the markets, the governor Stanley Fischer is showing that he is not willing to let the rates fall below certain levels. This has a small impact on the psychology of traders who will be fearful of trading around certain levels with the fear their trades could be wiped out by intervention from the Bank of Israel.

2) Whilst I think it is worthwhile, I believe that the weakness of the Dollar is not something our small little country can control. By intervening with relatively small amounts we are not going to make the Dollar weaken long term. Consider other countries that are now intervening as well. China, Japan etc can intervene in much larger amounts than we can.

3) The market will do what the market wants. What I mean by this is that if there is a worldwide trend of a currency weakening (or strengthening) I think there is very little we can do to stop the global trend.

The problem Stanley Fischer now has, and will continue to have is balancing the need to put interest rates up with the need to keep the shekel as weak as possible. This is not easy, but he is the man that has won many awards for his handling of the recession here in Israel.

Daniel Engelsman

This decision was expected, but not popular. There were two considerations the Governor of the bank Stanley Fischer had to think about.

1. Inflation – in particular house prices. House prices are showing double digit growth, and is hence reflected in the high inflation figures we are currently seeing. One of the best ways to reduce inflation is to put interest rates up. One of the reasons house prices are seeing such growth is because more and more people can buy thanks to the low interest for their mortgage. I am of the opinion that interest rates will have to go up substantially more in order to effect this housing ‘bubble’ we are currently witnessing.

2. The exchange rate. In theory, putting up interest rates in a country will strengthen that countries currency. In the case of Israel this is a huge consideration. The shekel is already very strong, and the increase in interest rates, coupled with other interest rates around the world staying very low is only going to strengthen the shekel even more. Our economy in Israel relies heavily on exports, and exporters rely on a weak shekel to make their goods affordable to their customers. The stronger the shekel becomes, the more expensive it is for countries to buy our goods, which increases the chances of them looking elsewhere for the same goods.

The Bank of Israel had a difficult decision to make, and has decided to try and curb the house price situation rather than helping the exporters. They probably feel they can help exporters by intervening in the foreign exchange market, but lets be honest – that hasn’t worked for a while!

I believe this is going to be a long running situation and a similar decision will have to be made every month for the next few years!

It was a surprise for me, as a side effect of raising interest rates is the shekel should strengthen. I was of the opinion that the Bank of Israel would wait a month to raise rates as we have seen intervention in the foreign exchange markets this week, and this decision would only mean more intervention is needed.

So as a result we have seen the shekel strengthen slightly, but as Israel enters the festival of Pesach we will see nothing in the way of intervention until at least Wednesday…..and who knows how low the exchange rate might be by then!

DE