Dollar to NIS 3.30 is 'the new normal' - Leumi

The shekel-dollar exchange rate is likely to hover around NIS 3.30 for the near future, according to Bank Leumi analysts.

“In our estimation, the NIS 3.30 dollar rate has become the ‘new normal,’ in contrast to recent years, when we were accustomed to seeing the shekel at an average rate of NIS 3.60, and reaching 3.80 at some point almost every year,” Leumi head of market strategy Kobi Levi wrote in a recent note to investors.

“Assuming a weakening of the dollar worldwide, by the end of 2021 the average exchange rate of the shekel will be in the range of NIS 3.25-3.35 per dollar,” he wrote. “This forecast takes into account the continued massive intervention of the Bank of Israel in trade, in volumes that exceed the annual framework of $30 billion. The shekel may exceed this range for short periods of time as a result of the realization of risk events or unforeseen events.”

The shekel-dollar rate was NIS 3.27 Monday morning. It reached 3.34 at the end of March and has been below 3.40 since early November.

“There are a number of opposing forces that will affect the strength of the shekel in the coming year,” Bank Leumi said. “Supporting the shekel are Israel’s current account surplus and the surplus in the balance of payments. On the other hand, the Bank of Israel’s interventions, the huge volume of purchases and the expanding interest rate policy would serve to weaken the shekel.”

“Increasing private consumption, an increase in the volume of investments in raw materials and the rise in world commodity prices will support increased imports,” it wrote. “Exports are likely to continue to grow, led by the hi-tech sector, the semiconductor industry and the domestic gas sector. In terms of capital movements, the entry of foreign investment is expected to continue. From the beginning of the year, we have seen a record number of investments in local hi-tech companies.”

Another factor that can affect the strength of the shekel is inflation, Leumi said.

“Israel has been exceptional in the world in the past year in this regard,” it wrote. “The real interest rate in Israel (inflation rate less nominal yield) was positive, because inflation was negative and interest rates were zero. In contrast, inflation is expected to rise in the coming year. That would make the real interest rate become negative, reducing one of the forces supporting the shekel.”

Risk factors affecting the shekel’s outlook include “political instability, changes in the distribution or effectiveness of the vaccine, Israel’s lack of a budget, and uncertainty about the credit rating of Israel,” Leumi said. “Israel is running without a budget in 2020, and the rating agencies really do not like it. Damage to Israel’s credit ratings could lead to short-term devaluation of the shekel. This is arguably the most significant issue to be solved at the present time.

“Also, if there is a decline in global equity markets, the shekel will probably weaken, as has happened again and again in the last 10 years,” it wrote.