According to Wells Fargo & Co., the recent decline in the value of the Israeli shekel was excessive, and the possibility of intervention by the country’s central bank is likely to pave the way for a comeback in the value of the currency in the weeks ahead.
According to a statement made by a US bank, the declines in the shekel, which have been driven by fears over a disputed judicial overhaul, are divorced from some of the strongest economic fundamentals in emerging countries. The shekel is expected to make a gain of almost 7% against the dollar by the end of the first quarter, which will wipe away the majority of its losses from the previous month. This is according to the report.
“We believe the chance of BOI intervention to support the shekel is rising,” Brendan McKenna, a strategist at Wells Fargo & Co. in New York, wrote in the research dated Thursday that “We believe the likelihood of BOI action to support the shekel is rising.” The currency “is oversold and is no longer connected with the core fundamentals of Israel’s economy.”
On Wednesday, Israeli media outlets reported that the Bank of Israel has convened an exceptional meeting of Israel’s Financial Stability Committee in order to discuss the unusual volatility that has been seen in the markets. In 2018, the committee was established with the goals of promoting orderly and stable activity within the financial system and coordinating amongst the various regulatory authorities. Its meetings take place on average four times per year.
FX Firepower
McKenna predicted that the shekel would strengthen as a result of the “off-cycle meeting” as well as Prime Minister Benjamin Netanyahu’s defense of the autonomy of the central bank on Wednesday.
The implied volatility of the Israeli currency for one month declined for a second day on Friday, after posting the most rise among major currencies over the course of the previous month. The shekel’s value has dropped by 8.3% during the past month, making it the worst performer among the main currencies of the globe.
McKenna said-
“In the coming days, we would not be surprised if BOI policymakers announced an FX intervention program to provide additional support to the currency and manage outsized volatility”
“Given the central bank’s more-than-adequate FX reserve position, policymakers certainly have the firepower to execute an effective currency management program.”
According to Morgan Stanley, the last time the central bank intervened to protect the shekel was in March 2020, when the currency had dropped by almost 10%. This week, the United States bank discontinued its advise to short the shekel against the euro, citing the fact that the risk premium associated with the Israeli currency has already reached “prior extremes.”
Evaluations of Credit
When compared to other emerging economies, S&P Global Ratings considers Israel’s creditworthiness to be the highest. McKenna stated that Moody’s Investors Service has a constructive outlook on the country’s A1 rating, which indicates that an upgrade may be on the horizon.
The strategist said
“While local politics now represent a downside risk to the rating, a downgrade out of investment grade territory or toward the lower end of the investment grade spectrum is unlikely”
“It is these sound fundamentals that historically have led to subdued Israeli shekel depreciation, even during periods of extreme stress in global financial markets.”
The shekel is the world’s only major currency to strengthen against the dollar over the past decade.
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