Currency traders remain bullish on the shekel
Optimists ignore Fischer’s praise for Swiss intervention to stem currency appreciation
Bank of Israel Governor Stanley Fischer’s praise for intervention to stem currency gains is being dismissed by traders, who are the least bearish on the shekel in more than 19 months in a bet on the country’s economy.
The 1.25 percentage-point premium traders were paying this month for contracts granting them the right to sell the shekel, relative to options to buy the currency, was the least since July 2011, three-month 25delta-risk-reversal rates show. The shekel has appreciated 7 percent since mid-November, making it the third-best performing currency worldwide, according to data compiled by Bloomberg.
“Some investors see Israel a little bit like a safe haven with quite a defensive currency in the context of global crises elsewhere,” Gaelle Blanchard, an emerging-markets strategist at Societe Generale SA in London, said in a February 11 interview. “Israel’s overall fundamentals are strong, with a pretty sound and healthy economy compared with emerging Europe economies.”
The currency is on the rise even as Fischer, credited for helping the economy rebound from the global financial crisis faster than most peers, said he would resign at the end of June and that the central bank is “going to have to watch” foreign inflows and shekel appreciation. Both are developing as global monetary policies become more expansionary.
Growing economy
Fischer praised the Swiss National Bank on February 7 for successfully defending a ceiling of 1.20 francs to the euro starting in September 2011, after it appreciated from about 1.60 in 2008.
“You can fight the market,” Fischer, who took the helm as Israel’s central bank chief in 2005 after jobs as the No. 2 at the International Monetary Fund and vice chairman at New York-based Citigroup Inc., said at a conference in Prague.
Traders are betting that Israel’s economy is too strong to keep the shekel from appreciating. Gross domestic product may expand 3.8% in 2013, the central bank said in December, updating its forecast from 3% to include rising natural-gas production. While the economy, which derives 40% of its GDP from exports, slowed to 3.3% last year from 4.6% in 2011, it was still better than the 0.5% contraction in the euro area and the US’s 2.2% gain.
Flows from Israel’s Tamar field are set to begin next quarter, enabling the country to reduce its dependence on imports and improve its currentaccount balance by as much as $3 billion this year. For every $1b. improvement in the balance, the exchange rate should appreciate about 1%, the Bank of Israel has estimated.
Rates unchanged
The shekel fell 0.1% to $3.7105 per dollar at 10:36 a.m. in New York on Monday after the Bank of Israel kept its benchmark interest rate unchanged at its lowest in more than two years as rising house prices balanced slowing growth and inflation.
The currency appreciated from 3.9823 on November 15 and last year’s low of 4.0990 on July 26. Only the Paraguay guarani and Romanian leu have performed better than the shekel since mid-November, according to data compiled by Bloomberg.
Israel swung to a seasonally adjusted $848 million currentaccount surplus in the third quarter, its first in a year, as imports declined more than exports. The country’s move to produce its own fuel comes after Egypt cut its flow of gas to Israel last year, forcing companies to switch to moreexpensive imported alternatives.
Israeli gas exploration companies including Delek Group Ltd. and Houston-based Noble Energy Inc. have discovered enough gas under the Mediterranean Sea over the past three years to supply the country’s needs for 150 years.
Leviathan find The Leviathan offshore natural-gas field, the world’s largest such find in a decade and estimated to hold 17 trillion cubic feet of natural gas, is scheduled to start production in three years.
“The use of offshore natural-gas reservoirs will contribute to an increase in the current-account surplus and thus will also be a factor supporting the appreciation of the shekel in the coming year,” according to the minutes of the central bank’s last interest-rate meeting released February 11.
Fischer is no stranger to intervention. To moderate shekel gains, support exporters and help the economy weather the global financial crisis, the Bank of Israel started to buy foreign currencies in March 2008, its first such action since 1997.
‘Some investors see Israel a little bit like a safe haven with quite a defensive currency in the context of global crises elsewhere’
Back then, the shekel had appreciated about 20% from December 2007 to 3.3650 per dollar on March 19, 2008, its strongest in about 11 years. By the following March, it had weakened to 4.2566.
Declining exports
Since then, the central bank has gradually cut its key interest rate to 1.75% from 3.25% to spur the economy. Even so, exports fell an annualized 6.5% last quarter amid the debt crisis in Europe, the destination for 34% of Israel’s goods. Growth slowed to 2.5%, the least in more than three years.
A stronger shekel may be “problematic” for local technology companies such as Nice Systems Ltd., a maker of analytical telecommunications products, its chief financial officer, Dafna Gruber, said February 13.
Ra’anana-based Nice, which exported 60% of its products to the US in 2011, has stopped hiring, she said. The Manufacturers Association of Israel urged Fischer this month to intervene to stem the shekel’s rally.
While a successor to Fischer has not been named, his comments in favor of intervention lessened doubts regarding his willingness to take such steps before he steps down from his post in June, Alex Zabezhinsky, chief economist at DS Securities & Investments Ltd. in Tel Aviv, said in an interview on February 19.
“Fischer has done it before, and he will do it again if needed,” he said.
Stock, swaps
Traders are betting the recent economic slowdown may prove temporary. The benchmark TA-25 Index of stocks is up 3.1% this year after rising 9.2% in 2012.
The cost of protecting Israeli government debt against nonpayment with five-year credit-default swaps slumped to a two-year low on January 23, according to data provider CMA, which is owned by McGrawHill Cos. and compiles prices quoted by dealers in the privately negotiated market.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
Tapping international markets, Israel raised $2b. of dollar-denominated debt at the end of January, including its first 30-year bonds in more than a decade, as the government took advantage of its lowestever international borrowing costs. Israel is rated A1 by Moody’s Investors Service, the fifth-highest investment grade.
Shekel volatility
Societe Generale expects the shekel to strengthen toward 3.65 per dollar by the end of September, a level at which the central bank may implement more monetary easing as well as intervene in the currency market, according to Societe Generale’s Blanchard.
“The shekel doesn’t appear overvalued,” he said. “We see room for appreciation, but the central bank is likely to fight this trend as it would hurt exports.”
The three-month risk reversal rate slumped to 125 basis points on February 14 from a three-year high of 255 basis points in November 2011. It ended last week at 125 basis points.
Volatility in Israel’s shekel declined this month, showing traders reduced bets for swings in the exchange rate. The currency’s three-month implied volatility dropped 20 basis points this month to 6.9% on February 14, the least since May 2012, according to data compiled by Bloomberg.
The Fischer-led Bank of Israel has surprised economists in about 25% of its rate decisions, more often than any other Organization for Economic Cooperation and Development country for which comparable data is tracked by Bloomberg.
“The central bank will see room for intervention if there is a market failure caused by a sharp rise in the shekel-dollar rate in a short period of time,” Rony Gitlin, head of spot trading at Bank Leumi Le-Israel Ltd. in Tel Aviv, said in an interview February 19. “We aren’t in this situation now as the shekel has been trading at a fairly stable range in recent months in line with the dollar around the world.”