Shekel Volatility Spikes as Netanyau Forced to Back Central Bank

Netty Ismail
·2 min read

(Bloomberg) -- Israel’s foreign-exchange market is going through an uncharacteristic bout of volatility amid a dispute over central bank autonomy and a wave of protests over judicial reform.

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The currency’s one-month implied volatility has jumped by more than any other major currency in percentage terms this year, rising five times more than its nearest competitor, the Taiwanese dollar. As of Wednesday, shekel volatility was at its greatest since the start of the pandemic.

The Bank of Israel highlighted the “considerable volatility” on Monday when it lifted its benchmark rate by a bigger-than-expected 50 basis points, a move that failed to prevent the shekel from becoming the world’s worst performer this week among major peers. The currency slid as much as 1.4% Wednesday before erasing losses after Prime Minister Benjamin Netanyahu spoke out in defense of the central bank.

“We expect volatility in the shekel to remain high in the next few weeks as uncertainty is elevated,” Filip Denchev, a London-based strategist at Morgan Stanley, said in a note on Wednesday.

On Tuesday, Israeli lawmakers approved a proposal to hand the government more power over the country’s top court, a plan that has unnerved markets and some international investors.

Options traders have boosted the odds that the shekel will weaken further to 3.9 per dollar by year-end to about 40%, from just 9% at the start of February. The currency was trading at 3.6147 per dollar as of 8:30 p.m. in Tel Aviv.

NatWest Markets is urging investors to short the shekel against the Czech koruna, saying Israeli debt is among the lowest yielding in emerging markets.

“The shekel will continue to be a regional underperformer,” said Eimear Daly, an emerging-market strategist at NatWest. “Investors are now more sensitive to political developments and we can expect them to be especially so if they are not being compensated with higher yield.”

--With assistance from Alisa Odenheimer.

(Updates prices.)

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