(photo credit: Bloomberg)
The shekel is expected to continue to gain in strength, albeit at a slower pace, on the back of a strong recovery in the economy and a gradual increase in the base lending rate, according to Credit Suisse Group “Israel’s economic fundamentals remain conducive to long-term exchange rate appreciation,” Ivailo Vesselinov, an economist at Credit Suisse, said on Wednesday. “At the same time, however, we believe that the central bank will stick in the short term to its policy of direct foreign exchange market interventions to slow down the shekel’s pace of appreciation.
Credit Suisse reiterated its bullish view on the shekel against the dollar over the medium term with three and 12-month forecasts for the shekel-dollar exchange rate of NIS 3.58 and NIS 3.52, respectively. On Wednesday, the shekel dropped 0.4 percent against the dollar, trading at NIS 3.65 from 3.63 a day earlier.
“While the shekel appreciated by over 4% during September, we think another similarly sharp appreciation is unlikely in the very near term and expect a more moderate pace of appreciation going forward,” Vesselinov said.
In the most recent inflation report from November, the Bank of Israel listed Israel among a group of countries that “should reverse the expansionary policies implemented since the peak of the crisis” and, as such, have to rely on an “increasing element of intervention in the foreign exchange market.”
“That said, we still expect that the Bank of Israel will increase gradually its tolerance toward shekel strength in the coming months, not least given the general environment of continued dollar weakness,” Vesselinov said. “The Israeli shekel is not significantly overvalued.
This lends weight to our view that the policy makers in Israel are unlikely to take drastic action (such as the imposition of outright capital controls) to materially weaken the shekel, but will likely continue to merely attempt to slow the pace and extent of appreciation in the short term.”
Among the main factors supporting continued shekel strength, according
to Credit Suisse, is real GDP growth that is robust and is on course to
top 4% this year; the strong balance of payments position, with the
current account surplus surging to 4.1% of GDP on a 12- month rolling
basis in the second quarter of this year; and the fact that the Bank of
Israel is the only major central bank in emerging markets that is
already in the process of raising its policy interest rate.
Additionally, Credit Suisse believes that the prospect of generalized
dollar weakness against emerging markets currencies should lend further
strength to the shekel.
At the end of October, Governor of the Bank of Israel Prof. Stanley Fischer opted to keep the policy rate on hold at 2%.
“We believe that this is only a temporary pause in the tightening
cycle,” Vesselinov said. “High-frequency indicators still suggest that
private consumption growth remained robust in the second half of 2010,
with real wages rising and the unemployment rate staying at a twoyear
low of 6.3% in August.”
Meanwhile, the central bank’s latest survey revealed that 12-month
forward inflation expectations remained at 2.9% by mid-October, still
stuck near the upper end of the 1%-3% target corridor.
“Against this background, we continue to project additional rate hikes
from the Bank of Israel in the coming months – our forecasts for the
policy rate remain at 2.25% for end-2010 and 3.00% for end-2011,”
“In contrast, our US economists continue to expect that the Fed will keep interest rates on hold until at least end- 2011.”