Central bank support leads Israeli shekel to pre-war levels

Support from Bank of Israel helps shekel recover to surpass pre-war levels

The Israeli shekel strengthened for its sixth straight day, briefly surpassing its pre-war level against the USD, with the central bank intervening by spending billions of dollars in foreign exchange reserves to defend the currency.

The shekel rose by up to 0.8% against the dollar, reaching 3.8419, stronger than its closing level of 3.8461 on October 6 — the day before the conflict began.

The Bank of Israel disclosed that it sold $8.2 billion in October to safeguard the shekel, which had hit an 11-year low of 4.08 the previous month.

Following the surprise attacks on southern Israel by Hamas on October 7, fears about the conflict potentially expanding to involve other hostile states in the region led investors to abandon Israeli assets, posing a significant threat to the nation's economy. Government bond prices fell, and the costs associated with insuring Israel's debt against default — measured by credit default swaps — more than doubled, while the stock market plunged to its lowest point in over two and a half years.

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Bank of Israel: Interventions successfully support the shekel

According to a report by economists at Goldman Sachs cited by Bloomberg on November 9, Israel's balance of payments is currently more robust than in past conflict episodes, diminishing economic and financial vulnerability to shocks. The analysts also noted that the country tends to benefit from substantial financial inflows from abroad, including aid, during times of conflict.

The strategists wrote:

“Relatively stable market conditions could bring forward the timing of when rate cuts could be considered, although we think this will ultimately hinge on the intensity and duration of the conflict, and on the economic fallout from it”.

In October, the country's reserves declined by $7.3 billion, reaching $191.2 billion, as reported by the central bank. The decrease in foreign-currency reserves was somewhat mitigated by government transfers from overseas totaling $2.4 billion.

At the beginning of the conflict, the Israeli central bank committed to selling up to $30 billion from its foreign-currency reserves and offering an additional $15 billion through swaps to bolster support for the shekel.

Israeli economy: Key indicators show signs of recovery

“The Bank of Israel took very aggressive action,” Gil Moshe, the head of markets at the Israel unit of Citi, told Reuters.

“Whenever (market) players are seeing that the liquidity is there, and the Bank of Israel is on top of things and willing to intervene whenever it’s necessary, then they get more confident.”

The yield on Israel's 10-year government bond, which initially surged to 4.67% after the onset of the war, has now receded to approximately 4.25%, according to a report by Jamie Chisholm at MarketWatch. Five-year Israel Credit Default Swaps (CDS) have seen a decrease of about 20% from their recent peak, although they remain elevated. The Tel Aviv 125 equity index has also recovered nearly half of the 13.5% decline that ensued after the Hamas attack.

The stabilisation is yet to reassure global ratings agencies, such as S&P Global, Fitch and Moody’s Investors Service, which recently revised Israel’s economic outlook to negative.

At the time of writing on Wednesday, the USD to ILS exchange rate stood at 3.8433, with the shekel having gained 0.22% against the dollar on the day, as per MarketWatch data. The shekel has rallied close to 5% since October 26.

When considering foreign currency (forex) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.