JPMorgan Says Shekel Now Likely Severed From US Stocks for Good

Kerim Karakaya
·2 min read

(Bloomberg) -- The shekel is emerging from a year of political upheaval in Israel with a broken correlation to US equities, a deviation that may be here to stay, according to JPMorgan Chase & Co.

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Long more in sync with global technology stocks than domestic drivers, the currency has been set adrift this year as Prime Minister Benjamin Netanyahu’s efforts to wrest more power away from Israel’s courts divided the country and triggered massive street protests.

“Persistent domestic political risks have inspired a structural shift in foreign allocation for local institutional investors,” JPMorgan strategist Anezka Christovova said in a note. “This shift may have some further to run and it means that the gap between the shekel and US equities could be permanent in nature.”

In the decade through the end of last year, the shekel was one of the rare currencies in the world to strengthen against the greenback, as Israel ran a current-account surplus and benefited from technology investment and increased natural gas exports.

And with Israeli institutional investors allocating more capital toward equities abroad, their hedging of foreign-exchange risk used to ensure the shekel often moved in tandem with US markets.

But the relationship no longer holds. The shekel has lost nearly 9% against the dollar in 2023, trading in recent days at a three-year low.

By contrast, excitement over artificial intelligence applications and signs the US Federal Reserve was nearing the end of its tightening cycle drove the Nasdaq 100 to a gain of almost 40% so far this year.

Without outright positions on the shekel, JPMorgan said “political risk is likely to remain elevated” as the government’s steps to overhaul the judicial system face challenges in court.

At the same time, Israel has the “strongest disinflation story in the region” and JPMorgan’s economist projects the central bank “is now done” with its cycle of interest-rate hikes.

“We keep a bearish bias on the shekel,” Christovova said. “Poor entry levels and high day-to-day political volatility keep us on the sidelines.”

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