US Dollar’s Comeback against the Shekel
Written by: Aaron Katsman | June 8, 2007
By Aaron Katsman
www.IsraelNewsletter.com
One of the biggest beneficiaries of Israel’s strong economic recovery and massive inflow of foreign investment over the last 4 years has been the Israeli shekel versus the US dollar. On May 14th the Shekel hit its high of 3.96 to the Dollar, culminating a rise of more than 12% against the greenback over the last 10 months. Over the last 3 weeks the Dollar has staged a strong comeback trading today at over 4.20 to the Shekel, a gain of about 6%.
As I have written in previous posts over the last few weeks, this Dollar strength has been anticipated, as the Bank of Israel has been doing whatever they can in trying to talk up the Dollar. The BOI has been lowering interest rates, but many analysts feel that they can cut no more. Officially, Israel has been experiencing little to no inflation over the last 12 months, but that is deceiving. The Dollar is a major component in inflation calculations, so the weakness in it has skewed the numbers to next to nothing. Morgan Stanley analyst Serhan Cevik warned that under the radar, inflation is there and it’s strong, running at 4% once linkage to the dollar is weeded out. He counseled the Bank of Israel, not that it asked, to stop lowering interest rates.
With no fundamental changes with the economy, why the recent comeback in the Dollar? First and foremost I think we have a situation where foreign institutions have decided to take profits and they have begun to sell parts of their stock and bond positions that trade on the Tel Aviv exchange. Once they sell, they convert the Shekels back into Dollars, before brining their money back to the US. In addition, as we are approaching summer, the Israeli media is full of reports that perhaps there will be a war in the coming few months. Local Israeli market participants have started to take that threat seriously, and have started to buy Dollars as a hedge. The third reason is that with the largest par ever between Shekel/ Dollar interest rates, and bond yields surging in the US, money is coming out of Shekel fixed income instruments and heading into Dollar denominated bonds.
I would expect this Dollar strength to continue for some time. We have seen the strength of the shekel negatively impact earnings of Israeli companies that trade in the US. Due to the fact that most of their R&D is done in Israel, and they then must pay salaries in Shekels, many companies experienced lowered net income in Q1 ’07 because of this. While a sell off in Israeli equities may negatively impact Israeli stocks that trade in the US, look for many of these companies to post earnings surprises in Q2 as their expense lines will get pared back.
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Aaron Katsman is the lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.
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