Shekel forecast: USDILS hits 2016 lows due to Gaza war

Bank of Israel sells $30 billion of forex reserves in attempt to stabilise shekel, USDILS at lowest since 2016

The Israeli shekel, trading at close to 3.9 per U.S. dollar (USD/ILS), has reached its lowest level since 2016 due to the escalation of the Israeli-Palestinian conflict.

On October 7th, Palestinian Islamist militant group Hamas launched a surprise attack on Israel, prompting retaliatory strikes from the latter. On Sunday, Prime Minister Benjamin Netanyahu pledged that Israel would continue “without limitations or respite” until the objectives of its offensive were met.

To prevent further shekel depreciation and provide market liquidity, the Bank of Israel carried out its first foreign currency sale in about two years, totaling up to $30 billion. This move comes as the shekel was already facing pressure due to Prime Minister Netanyahu's actions against the country's judiciary system, despite earlier protests in the year.

"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 on Monday.

Before the attack on Saturday, the shekel had already depreciated by 10% in 2023, reaching a rate of 3.86 per dollar due to political instability. On the heels of what is expected to be a long war with Hamas, the USD to ILS rate the shekel seems to be set for another sharp depreciation.

Benita noted that prior to the start of trading, the exchange rate surged to as high as 4.3 shekels per dollar overnight in Asian markets.

"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.

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USD to ILS forecasts: Analysts say BoI may sell forex to keep shekel at 4 to dollar

Murat Toprak, CEEMEA FX strategist at HSBC, told Reuters:

“At the current juncture, the central bank’s priority is only to ensure a normal functioning of markets.”

In a report, economists at Citi said even though they expected a weaker shekel in the medium term, a longer-term USD to ILS forecast would see a potential recovery:

"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 Israel’s central bank to plan for "protracted pressure" on the currency. JPMorgan’s Anezka Christovova told Reuters:

“Given potential passthrough to inflation as well as sentiment impact, we think levels near 4.00 may see more substantive FX selling by [the Bank of Israel].”

The dollar to shekel forecast shared by economic data aggregator TradingEconomics on October 10 saw the commodity trading at a potential average of 3.91 by the end of this quarter. The platform’s 12-month USD to ILS forecast estimated the pair to trade at 4.11 by early October 2024.

USD to ILS news: Israel well-positioned to support shekel amid turmoil

Israel's foreign exchange reserves have surpassed $200 billion, amounting to nearly 40% of its GDP. The majority of these reserves were accumulated since 2008, with the aim of preventing excessive strengthening of the shekel, which could adversely affect exporters. This strategy was implemented as foreign investments in Israel's thriving tech sector surged during this period.

"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.

USD/ILS traded at 3.9532 at the time of writing, up 0.08% on the day, as per MarketWatch data.

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