In order to ensure stability amid the conflict with Palestinian terrorists in Gaza, the Bank of Israel said on Monday that it will sell up to $30 billion in foreign currency on the open market. This will be the first time the central bank has ever sold foreign currency.
After the decision, the shekel USDILS dropped 2.8% against the dollar to 3.95, its lowest level since February 2016, matching its worst intraday movement since March 2020.
Golan Benita, chairman of the Bank of Israel's markets division, addressed a press conference and stated, "We are in an unprecedented security situation,
And our estimate was that the market could get to a situation of divergence without the announcement of our intervention." Political unrest has already caused the shekel to lose 10% of its value this year, falling to 3.86 to the dollar. Political unrest was predicted to worsen after what is anticipated to be a protracted battle with Hamas in Gaza.
According to Benita, the currency rate spiked to as high as 4.3 shekels per dollar overnight in Asia before the start of trading.
"Therefore it was important for us before the opening of trade in the local market to increase the certainty in the market or decrease the uncertainty in the market, in order to moderate as much as possible incidents of overreactions ... and ensure the markets' regular activity," he stated.
According to Benita, there are currently no plans to sell more than $30 billion worth of foreign currency, and the large level of reserves gives the central bank the flexibility to support the economy in times of crisis.
According to Murat Toprak, CEEMEA FX strategist at HSBC, "at this point, the central bank's priority is only to ensure a normal functioning of markets."
The central bank also announced that it will offer up to $15 billion in market liquidity through swap arrangements.
"The Bank of Israel will continue monitoring developments, tracking all the markets, and acting with the tools available to it as necessary," it stated. According to Citi researchers, "Despite our expectation of a weaker shekel in the medium term - softer tech equity flows,
a more complex political background and more two-sided risks to monetary policy - we do not expect further sustained bouts of shekel weakness." According to JPMorgan, the central bank would likely prepare for "protracted pressure" on the currency.
Anezka Christovova of JPMorgan stated, "Given potential passthrough to inflation as well as sentiment impact, we think levels near 4.00 may see more substantive FX selling by BoI."
Bloomberg ReutersShekel drops to its lowest level since 2016
STOCKS AND BONDS
Following the deadliest incursion into Israeli territory since Egypt and Syria's attacks during the Yom Kippur war 50 years ago, Israeli stock and bond prices fell 7% on Sunday. On Monday, however, the key Tel Aviv share indices (.TA35), (.TA125) recovered and closed 0.7%-1% higher in strong turnover of 3.4 billion shekels ($862 million), while government bond prices were mixed.
The majority of bonds were expected to end between 1 and 3.5 cents lower (XS2167193015=TE), while the 100-year bond due in 2120 (US46513JB593=TE) was down more than 5 cents at barely 65 cents, almost matching its largest daily loss.
In an effort to prevent the shekel from overstrengthening and hurting exporters as foreign investment in the nation's IT industry surged, Israel has built currency reserves worth more than $200 billion, or over 40% of its GDP.
"Israel has one of the best positions in emerging markets," stated Murat Toprak of HSBC. "Reserves are sizeable and comfortable by any metric."
The bank's most recent intervention was in January 2022. Amir Yaron, the governor of the Bank of Israel, told Reuters last month that despite the drastically depreciated shekel,
which has contributed to driving up inflation, there was no need for intervention because there were no market failures.
On Monday, Israel issued 2 billion shekels ($508 million) worth of local bonds amid extremely high demand, claiming that the country's capacity to borrow debt and fund the government's operations—even in emergency situations—is proof of the market's faith in the country.
(3.9407 shekels = $1)
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