Merrill Lynch Bullish on Shekel

The Bank of Israel’s ongoing efforts to rein in the shekel have run up against “Buy” recommendations issued by Merrill Lynch and Morgan Stanley, which have given the shekel fresh impetus, Globes said on Sunday.

“Leaning-against-the-wind intervention rarely proves effective. Academic literature, as well as the BoI’s own past experience, suggests intervention against currency appreciation when macro conditions require monetary tightening tends to be less effective,” Bank of America Merrill Lynch wrote.

Under the heading, “Bank of Israel Intervention Not Enough to Stop the Trend,” Merrill Lynch analysts argued that the Bank of Israel’s “commitment remains limited to fighting sudden appreciation episodes, and interventions won’t be enough to combat the overall trend.

“Under the current leadership, the Bank of Israel has never bought more than $2 billion, and hardly ever more than $1 billion, suggesting no appetite to fight the current account trends.”

The analysts also write, “The Bank of Israel’s passive intervention (only after sharp shekel appreciation) lacks the important expectation channel, and stacks up quite low vs inflows. Against the structural appreciation bias and the Bank of Israel ‘s weak foreign exchange policy, local institutions’ foreign investments should remain heavily foreign exchange hedged.”

Morgan Stanley concurred that BoI intervention on a larger scale is not anticipated, thus opening the way for more purchases. Their analysts believe that Israel’s central bank is comfortable with the weakening of the shekel by 3 percent following its January intervention, and that anything more aggressive should not be feared.

Forex market traders were quoted saying that in the view of the fact that the two recommendations came after a meeting of representatives of foreign banks with the Bank of Israel, suggests that they were not persuaded of the latter’s determination to weaken the shekel, which in turn will make it even harder to stem its surge in coming days.

On Sunday, the dollar/shekel exchange rate stood at 3.4326.

Meanwhile, President Donald Trump’s announcement of intentions to steel and aluminum tariffs, thereby spurring fears of a trade war, has also contributed to the relative weakness of the dollar.