Uncertainty Over Central Bank Hitting Forex Market
BMI View: Uncertainty surrounding the appointment of Israel's new central bank governor is underpinning the ongoing appreciation of the shekel. That said, the BoI will continue to intervene in the forex market to stem appreciatory pressures on the unit over the medium term. In addition, we reaffirm our view that further interest rate cuts are on the cards over the coming quarters.
The appointment of a new governor of the Bank of Israel (BoI) appears fraught with obstacles after former governor Stanley Fischer stepped down on June 30. Although Jacob Frenkel, JPMorgan Chase International's current chairman, was appointed governor on June 23, he announced that he no longer wanted the job on June 29. The decision likely resulted from media reports that he failed to inform the government that he was detained in Hong Kong seven years ago after allegedly leaving an airport shop with an item he hadn't paid for. Netanyahu's second choice, Bank Hapoalim Ltd.'s chief economist Leonardo Leiderman, pulled out on August 2 for personal reasons, two days after he was nominated. Karnit Flug, Fischer's deputy, announced that she would not take the job after the government asked Lieberman to fill the position. Flug is currently serving as a caretaker governor until a new candidate is picked.
Investor's reaction to recent developments has been relatively calm. Yields on Israel's benchmark 4.25% 2023 bond came in at 3.76% on August 6, having increased 2.2% since July 29. That said, the increase was likely caused by the recent spike in US 10-Year Treasury yields, which came in at 2.7% on August 5 and look like they could potentially head higher (see 'Global - Rising US Yields Bolstering Asset Class Strategy', August 5). Israel's Tel Aviv 100 (TA-100) equity index gained 1.0% since June 29, trading at 1,098 at the time of writing, well within our 1,050-1,150 target band (see 'Equities: Still Neutral', July 3).
|Yields To Increase Further|
|Israel 2023 Bond Yields, %|