By ARIE TAL
Concerns among officials and decision makers over further appreciation of the Israeli shekel (ILS) are on the rise. The ILS keeps strengthening against the US dollar (USD) despite Bank of Israel's (BoI) aggressive and controversial intervention in the foreign-exchange market.
The government, led by the treasury department, recently decided to join the battle from a different angle. Officials plan to launch a foreign currency exchange rate insurance plan to support small and mid-size exporters, while the exporters themselves, which include the Israeli leading sector - Hi-tech, try to convince the government to re-adopt the questionable "diagonal Policy".
In general, the policy's principle is setting a floor and ceiling price to the "greenback" in order to protect the export based industries that are highly exposed to foreign exchange risks. At this point of time, the odds of implementing the diagonal policy are approaching to zero.
The creative attempts of BoI's chairman Mr. Stanley Fischer to create a floor under the exchange rate were fruitless so far. The ILS rose by 1.2 against the dollar since the beginning of the month, and by 12 percent since April 23rd. Is this trend going to continue? Does the BoI have the ability to put an end to this phenomenon? Unfortunately, the answers to these questions are not based solely on quantitative measurements and macroeconomic predictions. Factors such as investors' psychology and exogenous forces such as speculators or geopolitics developments may affect dramatically the foreign exchange rate.
From a macroeconomic view, there is a greater probability that the USD will continue to depreciate against the ILS. The US budget deficit is in its historical peak and still rising due to descending tax revenue and large government spending that is aimed to support the relatively weak economy.
In numbers, federal budget deficit projected to exceed $1.5 trillion in the fiscal year that ends Sept. 30. Thus, the government continues to print money to finance both its spending and debt and by that it devalues the currency. In addition, the current account deficit is still high despite the slight improvement in the last months (the weakness of the dollar contributed significantly to this improvement), while the Israeli current account enjoys an up-trending surplus. Due to the negative developments in the financial statements of the US, International demand for its financial assets weakened in the past 4 months as investors cut purchases of Treasuries and corporate bonds which means less demand for dollar assets.
Additionally, the Israeli real economy is positioned in a better situation compared to the US, the inflation remains high due to strong private consumption (among other things), and the interest rate is expected to rise by 1% in the next 12 months while in the US it is expected to remain unchanged at least in the next six months. The current spread between the interest rates and the expected spread-widening supports additional foreign investment in shekel based assets.
Will Chairman Fischer be able to stop the USD depreciation? The answer is no! Normally, macroeconomic forces overpower exogenous un-free market forces. Furthermore, the USD depreciation takes place all over the world. The percent of major currencies rising against the dollar is above eighty percent - historical high. The dollar has depreciated against the 6 major currencies (EUR, JPY, GBP, CAD, SEK and CHF) by more than 14% since April 23rd while as noted above it depreciated by "only" 12 percent against the ILS. Bottom line, if the dollar will continue to weaken in the world it will probably weaken against the ILS as well.
The writer is Chief Analyst and Strategist at Alumot-Sprint Investment House and also a regular writer for several leading financial papers and websites
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