Shekel extends Friday gains as Israel launches “second phase” of Gaza offensive 

The New Israeli Shekel strengthened on Monday, building upon the gains it made on Friday against a weakening dollar as Israel sent troops and tanks into the northern Gaza Strip.  

As noted by Bloomberg’s Kerim Karakaya and Netty Ismail, market observers saw the Israel Defence Force’s move as a slightly more gradual approach than what had been initially announced. 

Despite the shekel being the worst-performing currency in the world this month and reaching 11-year lows, it saw a temporary pause in its decline. At the time of writing, the shekel gained close to 0.6% against the dollar, trading at 4.0398, as per MarketWatch data. In contrast, the U.S. dollar showed a decline against major currencies for the second consecutive day. 

Bank of Israel: Central bank holds interest rates, props up shekel with FX reserves 

The Bank of Israel's commitment to mitigating volatility has contributed to the stabilization of local assets. Analysts have noted that the Israeli central bank possesses sufficient foreign exchange reserves to counteract the shekel's depreciation — it announced that it would support the shekel by selling up to $30 billion worth of forex several weeks ago. 

On October 23, the Bank of Israel maintained its main interest rate at 4.75%. The decision was aimed at stabilizing the shekel, which was on its longest losing streak since 1984.   

Israel economy forecast: JPMorgan sees 11% contraction in Q4 2023 

However, the ongoing conflict has led to a sudden drop in economic activity, with investment bank JPMorgan Chase & Co. projecting a potential 11% annualized contraction in Israel's economy for the last three months of the year. Options markets have indicated elevated levels of bearish bets against the shekel — the additional cost of protecting against shekel depreciation in the upcoming month compared to hedging against its appreciation has risen to 1.7 percentage points, up from less than 1.6 percentage points on Friday, according to risk reversal data cited by Bloomberg. 

While Israel continues with what it terms the “second phase” of the conflict, involving an expanded ground offensive in Gaza and an airstrike in Syria, equity indexes in the Middle East recorded gains, and oil prices declined as concerns eased regarding a broader regional conflict. 

Shekel forecast: Markets pricing in “relatively contained” situation, but risks remain 

Emre Akcakmak, portfolio manager at Dubai-based East Capital International AB, told Bloomberg on Monday that markets were anticipating a contained conflict that would have a limited effect on markets, as opposed to a broader regional war: 

“Investors are evidently worried, but regional markets appear to be pricing in a relatively contained situation, with a muted reaction following the initial shock.” 

Ehsan Khoman, head of EM research at MUFG Bank in Dubai, told the publication that while the shekel and other regional risk assets were trading sideways, “fat-tail risks remain. Pricing that in is not clear-cut.” 

Since the start of the war, the shekel has shed close to 5% of its value against the U.S. dollar and is down 14.6% so far in 2023.  

At the time of writing, the USDILS exchange rate stood at 4.0399, as per MarketWatch data.