The foreign banks' warnings began to come true on Tuesday, with the US dollar's value went up 2% against the shekel to 3.64 in light of investors' concerns over the consequences of the judicial reform in the Israeli government. This has been the sharpest increase since last September and the biggest fluctuation that occurred compared to all other leading currencies worldwide.
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Obviously, the shekel has been weakened compared to all other currencies – 2% compared to the Euro and 2.7% to the Pound Sterling. Foreign exchange market traders said that the second the dollar reached 3.60 and passed this threshold, many stop-loss orders were triggered (closing positions at a loss), and from there, the path to 3.64 was a short one.
What caused the dollar's increase was the Knesset's passing the first reading of the judicial reform package in the plenum and Foreign Minister Eli Cohen's tweet that made its way to Bloomberg's headlines, being interpreted by foreign bodies as possible interference with the Bank of Israel's independence. The tweet was not unusual considering the times, but its timing, paired with the Knesset's provisional passage of the judicial reform, was the spark that set fire to the foreign exchange market.
Although it is only the first reading, and there is still a long way to approve all the reform bills, it is clear that the stock market, especially foreign investors, does not like the fact that there is no widespread consensus regarding the reform. The warnings voiced daily by many senior economists, international organizations, senior officials in the hi-tech industry, and, of course, the non-stop demonstrations, do not contribute to calming the situation, instead only causing alarm.
The abnormal volatility in the foreign exchange market and the sharp increase in 10-year bond yields are likely a promo for what will occur in the future. Even today, Citigroup strategists told Bloomberg that the shekel's value is expected to depreciate by another 8%, and its new target is 3.95. "Despite the 0.5% increase of the Bank of Israel's interest rates, the shekel continues to remain under pressure by local political noise," the strategists said. "It seems that the political situation will become more volatile in the coming weeks when the judicial reforms will be presented for a second reading in the plenum."
Even Peter Kisler, a manager at the "Trium Capital" hedge fund in London, said to Bloomberg in the same article, "It's the judicial reform continuing to weigh on the market. The magnitude of the currency's move has been quite large, but it can still weaken further."
When articles such as this are published in one of the biggest financial portals in the world, which is hard to blame for being left-wing or purposely wanting to harm Israel's economy, it affects the stock market. Foreign exchange traders in foreign banks read the warnings of objective senior officials and understand their message. They have no particular sentiments towards Israel, and if they are convinced that the NIS will weaken, they will continue to increase their shorts on it – like a snowball.
Suppose the USD's value continues to become stronger sharply. In that case, the consequences of the NIS's sharp devaluation are likely to be detrimental to the economy – it will first and foremost likely increase inflation in Israel that refuses to go down in the meantime, which will cause the Governor of the Bank of Israel to increase the interest rate more sharply. While the Bank of Israel has admirable foreign exchange balances amounting to over 200 billion dollars and can intervene in the foreign exchange market and sell USD, its influence is likely negligible compared to the vast amount of buyers.
Finance Minister Bezalel Smotrich's attempts today to calm the situation by making statements to the press, saying that he is not worried about the economy, will apparently not be helpful. Even Prime Minister Benjamin Netanyahu's tweet in which he said that the Bank of Israel's independence would not be violated cannot really help here. If the government stops the legislation and changes the reform so that all parties will accept it, things may return to normal. Israel's economy is strong, and in the meantime, we have seen merely a promo of what is likely to happen later in the future.
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