Karnit Flug, governor of the Bank of Israel, will probably have no choice but to use unconventional tools to weaken the shekel after it hit an all-time high, according to the currency’s top forecaster last quarter.

Bloomberg
Tel Aviv


Karnit Flug will probably have no choice but to use unconventional tools to weaken the shekel after it climbed to an all-time high, according to the currency’s top forecaster last quarter.
The Bank of Israel’s governor is running out of options to weaken the shekel, according to BNP Paribas’ Piotr Chwiejczak, whose estimate for the currency was accurate within 1%. The shekel has risen 3.1% against the dollar this year, the world’s best-performer according to a list of 31 currencies tracked by Bloomberg globally.
The Israeli regulator has cut interest rates 13 times since 2011 to counter a strengthening shekel and help shore up exports, which account for about a third of Israel’s $280bn economy. Before Flug downplayed the likelihood of using unconventional tools to stoke inflation last month, some analysts speculated that borrowing costs could be cut to negative and the central bank may start buying bonds.
“Israel will need to do more than they are doing now,” Chwiejczak, a London-based strategist for Eastern Europe, the Middle East and Africa, said in an interview on July 28. “I expect the Bank of Israel will at some stage use unconventional policies and that they will need to keep intervening.”
Aside from the rate cuts, the Bank of Israel renewed dollar purchases in April 2013 and bought $1.95bn in foreign currency in June, the most in a month since 2010. The shekel on July 28 soared to an all-time high against a basket of currencies, including the dollar and the euro, after policymakers kept the benchmark base rate on hold at a record low of 0.1% for a fifth straight month.
The shekel’s advance was spurred by the start of Israel’s natural gas production in 2013, boosting its current account surplus last year to the highest since 2010, data compiled by Bloomberg show. Foreign direct investment from companies such as Google and Apple have also contributed to the currency’s rise. Bank Leumi Le-Israel, the country’s second-biggest lender, sees the regulator moving away from rate cuts and using quantitative easing tools if the shekel continues to strengthen further and economic activity slows, it said in an e-mailed report on July 29. The nation’s gross domestic product will expand 3.1% this year, according to the average estimate of at least 14 economists surveyed by Bloomberg, up from 2.8% in 2014.
On the assumption the Bank of Israel will introduce unconventional steps, Chwiejczak forecasts the currency will trade at 3.80 per dollar through the end of 2015. There’s a 91% chance he’s right, implied volatility from options trading monitored by Bloomberg show.