The recent selloff in Israel’s shekel is overdone and the specter of central bank intervention will likely set the stage for the currency’s rebound in coming weeks, according to Wells Fargo & Co.
(Bloomberg) —
The recent selloff in Israel’s shekel is overdone and the specter of central bank intervention will likely set the stage for the currency’s rebound in coming weeks, according to Wells Fargo & Co.
The shekel’s losses, driven by concerns over a contentious judicial overhaul, are detached from some of the strongest economic fundamentals in emerging markets, the US bank said. The shekel is poised to jump by about 7% to 3.4 against the dollar by the end of the first quarter and erase most of its losses from the past month, it said.
“We believe the likelihood of BOI intervention to support the shekel is rising,” Brendan McKenna, a strategist at Wells Fargo & Co. in New York, wrote in the report dated Thursday. The currency “is oversold and is no longer aligned with the underlying fundamentals of Israel’s economy.”
Israeli media reported on Wednesday that the Bank of Israel called an extraordinary meeting of Israel’s Financial Stability Committee to discuss the unusual volatility in markets. The committee, which generally meets four times a year, was set up in 2018 to support stability and orderly activity in the financial system and to coordinate between supervisory authorities.
FX Firepower
That “off-cycle meeting” and Prime Minister Benjamin Netanyahu’s defense of the independence of the central bank on Wednesday will support the shekel, McKenna said.
The Israeli currency’s one-month implied volatility fell for a second day Friday after gaining by the most in the past month among major currencies. The shekel has slid 8.3% in the past month, the worst performance among major world currencies.
“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,” McKenna said. “Given the central bank’s more-than-adequate FX reserve position, policymakers certainly have the firepower to execute an effective currency management program.”
The last time the central bank intervened to support the shekel was in March 2020, when the currency plunged by about 10%, according to Morgan Stanley. The US bank closed its recommendation this week to short the shekel against the euro, saying that the Israeli currency’s risk premium has already risen to “previous extremes.”
Credit Ratings
S&P Global Ratings rates Israel’s creditworthiness the strongest among emerging economies. Moody’s Investors Service has a positive outlook on the country’s A1 rating, indicating an upgrade could be imminent, McKenna 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,” the strategist said. “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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