Bets against shekel mount pressure on Bank of Israel

Short positions against shekel mount pressure on Bank of Israel to keep currency stable

Traders have been increasing their bearish bets on the Israeli shekel, placing pressure on the Bank of Israel to maintain interest rates and stabilize the currency, despite the looming economic costs of a war looming over the country’s economy.

Short positions — bets on the shekel weakening — surged in the week following the surprise attack by Palestinian militant group Hamas on southern Israel on October 7, reaching their highest level since January 2022, according to Deutsche Bank research cited by the Financial Times.

“For this year short positioning on the shekel has reached an extreme level,” said Rohini Grover, a currency strategist at Deutsche Bank. Bets against the shekel had risen by more than any other currency that the bank tracks over the past two weeks, she added.

The shekel has fallen by 3.8% against the U.S. dollar since the Bank of Israel's commitment on October 9 to sell up to $30 billion of forex reserves to support the national currency. Since October 7 — the day of the Hamas attack — the shekel has declined by 4.8%. The USD to ILS exchange rate recently passed the key 4.00 mark, marking the Israeli currency’s weakest level since 2015.

This decline in the currency presents the Bank of Israel with a challenging situation. On one hand, it may face pressure to stimulate the economy by lowering borrowing costs in response to the economic shock. On the other hand, it needs to exercise caution, as a weaker currency could lead to an increase in the prices of imported goods.

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Shekel news: Bank of Israel to announce interest rate decision next Monday

On Tuesday, Bank of Israel deputy governor Andrew Abir indicated that when making policy decisions, officials would prioritize stabilizing the currency over stimulating economic growth. These comments, which suggested a reduced inclination to lower interest rates, contributed to some stability for the shekel. On Wednesday, the shekel traded at 4.03, aligning with levels seen the previous day.

Before Abir's remarks, markets had factored in a potential 0.5 percentage point reduction in interest rates over the next four months. However, after his comments, these expectations were scaled back to a 0.2 percentage point cut. The Bank of Israel is set to announce whether it will maintain the current interest rate of 4.75% on Monday.

Liam Peach, senior economist at Capital Economics, commented on the policy choice facing the BoI in a comment to the Financial Times:

“The Bank of Israel is worried about currency weakness and that feeding through to inflation. But it also understands that if they try to force it in a certain direction they could end up just burning through their reserves.”

At the beginning of October, the Bank of Israel held close to $200 billion in foreign currency reserves. In normal circumstances, this would cover Israel's imports for over two years, and based on the IMF's projections for 2022, it would equate to four times the nation's gross financing needs.

The shekel is under strain as Israel enforces a blockade on Gaza in preparation for a potential ground invasion, raising concerns about the possibility of further escalation in the conflict.

Shekel short positions: NIS under strain as Fitch puts Israel on rating watch negative

Credit rating agency Fitch, on Tuesday, switched its A+ rating for Israel's sovereign debt to a negative outlook, citing an increased risk that actors hostile to Israel, including Iran and Hezbollah, could escalate their involvement in the conflict. In a report released on October 17 and cited by The Times of Israel, Fitch wrote:

“The risk that other actors hostile to Israel, such as Iran and Hezbollah, could join the conflict at scale has risen significantly, as indicated by regular fire exchanges on the Israel-Lebanon border and declarations from high-ranking officials in Iran and from Hezbollah.

Such large-scale escalation, in addition to human loss, could result in significant additional military spending, destruction of infrastructure, sustained change in consumer and investment sentiment and thus lead to a large deterioration of Israel’s credit metrics.”

Analysts remain divided as to the effect of the mounting risks for the Israeli currency — Goldman Sachs and HSBC have said that Israel is well-positioned to prop up the shekel, while Citigroup saw the shekel underperforming.

The USD to ILS exchange rate stood at 4.0304 at the time of writing on Thursday, up 0.08% on the day, as per MarketWatch data. The dollar to shekel rate has gone up by over 14% year-to-date.

When considering foreign currency (forex) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.