Israeli Shekel Stable as Inflation Data Looms
Translated & summarized from Calcalist by baba
The Israeli shekel showed stability against the dollar, trading just above 3.06, as the country awaits key inflation data this week. Inflation expectations for the coming year have fallen to their lowest point since January 2022, though a short-term rise is anticipated. Despite a low budget deficit and inflation, rising domestic bond yields reflect investor concerns about future economic shifts and local political uncertainty.
The story in 6 lines · by baba
- The Israeli shekel traded slightly above 3.06 against the U.S. dollar ahead of inflation data releases.
- Inflation expectations for the next year have dropped to 1.95%, the lowest since January 2022.
- Institutional investors increased their foreign currency exposure to 20.9% in August.
- Economists predict the shekel will remain sensitive to U.S. stock market fluctuations.
- Investors are concerned about potential economic volatility and local political uncertainty.
- Israel's budget deficit remains below the target at 3.2% of GDP.
The Israeli foreign exchange market opened the week with relative calm ahead of key inflation data releases. On Wednesday, September's Consumer Price Index (CPI) will be published, followed by the Producer Price Index (PPI) on Thursday. In local trading, the U.S. dollar was trading slightly above 3.06 shekels, and the euro was above 3.43 shekels.
Globally, the U.S. dollar index remained largely unchanged at 102.2 points. The euro saw a 0.1% increase, trading around $1.12, while the British pound also rose 0.1% to over $1.32.
Economists at Leader, led by Yonatan Katz, noted in their weekly review that business sector trend surveys indicate important inflation environment indicators. Inflation expectations for the next year have continued to decline, reaching 1.95% in September, the lowest level since January 2022. However, Leader economists also anticipate an acceleration in inflation for October compared to previous years, likely due to rising global commodity prices.
Institutional investors increased their foreign currency exposure to 20.9% in August, up from 20.4% in July, although their overall exposure to foreign assets remained stable. Leader attributed the increased cost of hedging foreign currency exposure to Israel's interest rate cuts and the U.S. Federal Reserve's rate hikes, predicting that further U.S. rate increases, possibly in December, will widen interest rate differentials and increase hedging costs. They also stated that the shekel is expected to remain highly sensitive to fluctuations in U.S. stock markets.
Bank Hapoalim economists observed that despite Israel's positive economic outlook, rising domestic bond yields suggest market concerns about future negative changes. The budget deficit remained at 3.2% of GDP over the last 12 months as of September, well below the 2026 target. They questioned why bond yields are following global trends given low inflation and a recent interest rate cut, suggesting investors may view the current low inflation and deficit as temporary or subject to high volatility. They also noted that with inflation potentially rising to 2% and global central banks increasing rates, further rate cuts by the Bank of Israel are less likely. Additionally, local political uncertainty, particularly the possibility of an indecisive election outcome, is a significant concern for investors.
Mentioned
