The shekel strengthened this morning versus the basket of currencies of Israel's main trading partners, following the rally on Wall Street yesterday in response to the hawkish announcement by the US Federal Reserve. The announcement said that tapering of the asset purchasing program would be accelerated and projected three interest hikes in 2022. CNBC quoted Tom Lee of Fundstrat as saying, "I think the band-aid is getting pulled off. The market's been waiting for this. It was selling off on the rumor and it's time to buy the event."
The US central bank provided an optimistic forecast for the US economy and expressed satisfaction at the recovery of the US labor market, which enables decision makers to focus on inflation risks.
The shekel-dollar rate is currently down 0.75% in comparison with yesterday's representative rate, at NIS 3.114/$. The shekel-euro rate is down 0.5%, at NIS 3.5149/euro.
The shekel is appreciating sharply as financial institutions hedge their dollar exposure. A rise in stock market prices means a technical rise in exposure, and since that is already at record levels, the institutions tend to sell dollars when stocks in the US rise in order to reduce it. So far this year, Israeli financial institutions have sold foreign currency to the tune of $21 billion, thereby contributing to appreciation of the shekel.
The S&P 500 gained 1.63% yesterday; the Dow Jones gained 1.08%; and the Nasdaq 100 gained 2.35%.
How do we know that hedging by financial institutions is the main cause of the shekel's strength, and not high-tech, exports, or inward investment?
According to Meitav Dash chief economist Alex Zabezhinsky, one simple graph gives the answer. "The shekel-dollar rate in recent years has looked like a mirror image of the S&P 500. We don't think that the shekel affects the US stock market, but rather the other way around. It's clear that a solution needs to be found to the problem of the currency hedging transactions by investment institutions.
"When the US stock market rises, the institutions' currency exposure grows. In order to bring it back to the desired level, the institutions sell dollars in forward transactions. Hence the link between the shekel exchange rate and the US stock index. Last week provided a very clear illustration of the link, when after sharp rises in stock prices, the shekel made a powerful switch back to an appreciating trend."