The Bank of Israel said on Monday it will sell up to $30 billion of foreign currency in the open market, the central bank‘s first ever sale of foreign exchange, to maintain stability during the war with Palestinian militants in Gaza.
The shekel fell 2.8% versus the dollar to 3.95 – its weakest level since February 2016 – after the announcement and matching its biggest one-day move since March 2020.
“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,” Golan Benita, head of the Bank of Israel’s markets department, told a news conference.
The shekel had already weakened by 10% so far in 2023 to a rate of 3.86 per dollar on political turmoil, and on the heels of what is expected to be a long war with Hamas in Gaza the shekel was set to depreciate sharply.
Benita said that prior to the opening of trade, the exchange rate jumped to reach as much as 4.3 shekels per dollar overnight in Asia.
“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 said.
Benita said there were no plans at this time to sell more than $30 billion of forex and that the high level of reserves allowed the central bank room to support the economy in times of emergency.
“At the current juncture, the central bank’s priority is only to ensure a normal functioning of markets,” Murat Toprak, CEEMEA FX strategist at HSBC, said.
The central bank also said it would provide liquidity through swap mechanisms in the market of up to $15 billion.
“The Bank of Israel will continue monitoring developments, tracking all the markets, and acting with the tools available to it as necessary,” it said.
Citi economists said in a report: “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.”
JPMorgan said it expected the central bank to plan for “protracted pressure” on the currency.
“Given potential passthrough to inflation as well as sentiment impact, we think levels near 4.00 may see more substantive FX selling by BoI,” said JPMorgan’s Anezka Christovova.
STOCKS AND BONDS
Israeli stock and bond prices slid 7% on Sunday, a day after Hamas gunmen burst across the fence from Gaza in the deadliest incursion into Israeli territory since Egypt and Syria’s attacks in the Yom Kippur war 50 years ago.
On Monday, key Tel Aviv share indexes rebounded and closed 0.7%-1% higher in strong turnover of 3.4 billion shekels ($862 million), while government bond prices were mixed.
Israel’s dollar-denominated government bonds also fell sharply in European trading as investors got their first chance to react to the unprecedented attack. Most bonds were set to finish between 1 and 3.5 cents lower although the 2120-maturing 100 year bond was down over 5 cents at just 65 cents in what was close to being its biggest ever daily drop.
Israel has amassed forex reserves of more than $200 billion, nearly 40% of GDP and much of it from buying forex since 2008 to try to keep the shekel from strengthening too much and harm exporters as foreign inflows to the country’s tech sector soared.
“Israel has one of the best positions in emerging markets,” HSBC’s Murat Toprak said. “Reserves are sizeable and comfortable by any metric.”
The last time the bank intervened was in January 2022.
Last month, Bank of Israel Governor Amir Yaron told Reuters that despite the sharply weaker shekel that has helped to push up inflation, there was no need to intervene since there were no market failures.
Israel sold 2 billion shekels ($508 million) of bonds locally on Monday in very strong demand, saying the ability to raise debt and finance the government’s activities, even in times of emergency, is evidence of market confidence in Israel.
