It may have been the calendar's shortest month, but February was certainly long on excitement. In shekel trading, the USD/NIS and GBP/NIS exchange rates briefly made highs not seen in a while. Taking a new approach, Bank of Israel sought to weaken the shekel with a little help from its friends, although the party fizzled as soon as everyone went home – in more ways than one. Getting down to the bottom-line, the Tax Authority had its mind on the money with updates for cryptocurrency players, plus the Ministry of Transportation looks to get back on track. Ready to catch up on what you may have missed? Then all aboard because our monthly wrap-up is leaving the station…
From the IsraTransfer Trading Desk
It was a month of mixed emotions in currency trading, as unfortunately three times wasn’t a charm for Bank of Israel in their efforts to weaken the shekel and lift the USD/NIS exchange rate. After making a two-month high of 3.55 in the middle of the month, the rate gave back most of its gains that even included a brief trip down to the 3.43 level. While foreign currency purchases by an outside financial institution enlisted by Bank of Israel had been successful in buoying the exchange rate, their taking the day off for the US Presidents’ Day holiday showed it isn’t quite ready to stand on its own without external support. Compounding the downward pressure on the USD/NIS exchange rate was the announcement late last week of President Trump's plans to impose tariffs on international aluminum and steel companies, stoking the fears of potential global trade wars that helped to send the US dollar lower. If that wasn't enough, light trading volume due to the Purim holiday certainly did not help curb market volatility either.
Moving forward we see the market maintaining its "what have you done for me lately?" position, with news serving as the primary trading driver. Additionally, the holiday season continues into March with both the Pesach holiday, as well as it ensuing chol hamoed days. That said, expect more days of exaggerated swings in the USD/NIS, GBP/NIS, and EUR/NIS rates. Our view is that the intermediate-term trend in the shekel remains stronger, so those looking to convert their currency may want to take advantage of "up days" in the rates.
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Israel Economy Snapshot
Trading conditions aside, not to be overlooked as playing a role in February's renewed strength in the shekel was the report of a decline in the Consumer Price Index for the month of January. Leading the way in price decreases was a nearly 9% drop in clothing and footwear (perhaps courtesy of the Finance Ministry’s new Family Net program). Besides providing some relief to Israelis when it comes to costs, the prices pullback also lends credence to Bank of Israel’s recent intervention in the currency markets, at least in the intermediate term, as it continue to seek an inflationary uptick.
Speaking of inflation, were you aware that earlier this week marks nearly 3-years since the last time Bank of Israel changed its short-term key interest rate? However, while inflation has remained flat the economy has continued to chug along, with annualized growth of 3.60% in the fourth quarter of 2017, above a Reuters consensus of 3.40%, although below its 3.90% growth in the previous quarter.
Israel Real Estate
It was an auspicious start for the all new district-based New Homes Price Index, as in its first release the Central Bureau of Statistics reported a drop of 1.40% in new home prices. The report, covering both new and second-hand homes, revealed a decline during the period of November-December versus October-November of 2017 in five of the six districts measured. Experiencing the largest decrease were prices in Jerusalem, which retreated by 4.20%, more than double the 2% decline in the second place finishing Northern district.
Not to be overlooked, however, was a disclosure by the Central Bureau of Statistics that reduced price homes from the State’s Buyer Price program accounted for over one quarter of the transactions covered in the New Homes Price Index, so the 1.40% drop may not be an entirely accurate depiction of the current housing market climate.
Israel's Virtual Property Tax
For those wondering just how the Tax Authority would rule on the treatment of cryptocurrency, the wait is over. Under just-released new regulation, the “digital coins” will be treated as financial assets rather than currency. The decision will result in different taxable consequences, depending on the type of cryptocurrency activity they engage in.
Israel-based businesses employing cryptocurrency as part of their operations will be subject to a value added tax (VAT) on those activities, the same as they do now for any other product or service. Additionally, those accepting payment in cryptocurrency will also be required to pay a capital gains tax on their profits in them. The tax implications get even more complex the deeper you dig, such as for those that generate digital coins (such as mining farms), as well as entities that derive enough revenue from cryptocurrencies to qualify them as a business. Conversely, those looking to dabble in cryptocurrency solely for investment purposes will not be subjected to Israel’s VAT, however, they will be subject to the State’s 25% capital gains tax on the profits from their trading. Per a memo from the Tax Authority, the new rules and other regulations are effective immediately for the 2018 fiscal year.
Not So Fast!
Unfortunately, plans for the long anticipated Jerusalem-Tel Aviv express train route was dealt a blow with the announcement of a delay that could last up to six months. Progress had been chugging along nicely towards a March 30th maiden voyage, however, plans suddenly came off the rails when safety concerns surfaced due to a lack of necessary system testing. Moving forward, Minister of Transportation, Israel Katz, signaled plans to meet with executives from Israel Railways immediately in the interests of setting a new target date for full operation. Early indications are a renewed goal of Rosh Hashanah 2018 for the commencement date of the high-speed line. While the news comes as a disappointment to commuters looking to speed up their travel time, it's not without a silver lining. The good news includes an increase of service to four trains (from one) every hour, an extension of service from Jerusalem all the way up to Herzilya (versus Katz's original plan of just Tel Aviv's Hagana Station), as well as three months of free rides from Jerusalem once things get rolling.
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