J.P. Morgan Predicts Shekel Election Rally to Vanish, Dollar to Rise
Translated & summarized from Calcalist by baba
J.P. Morgan predicts the Israeli shekel's election-driven gains will disappear, with the dollar expected to rise to 3.10-3.12 shekels due to political uncertainty. The bank sees a unity government or repeat elections as likely outcomes. Factors like rising interest rate differentials and a weakening link to US tech stocks are also impacting the shekel's outlook, despite a strong balance of payments.
The story in 5 lines · by baba
- J.P. Morgan forecasts the dollar will return to 3.10-3.12 shekels, erasing recent shekel gains.
- Interim election results suggest political deadlock, not the government change markets priced in.
- A unity government under Netanyahu or repeat elections in 2027 are seen as likely scenarios.
- The cost of holding shekel assets has risen significantly, deterring institutional investment.
- The Bank of Israel is expected to implement one more interest rate cut, likely to 3%.
J.P. Morgan forecasts that the Israeli shekel's recent gains, fueled by election expectations, will be fully erased, with the dollar expected to return to the 3.10-3.12 shekel range. The bank's analysis, released after over 72% of votes were counted, suggests that the interim results point to a political stalemate, contradicting the market's pricing-in of a government change. The dollar traded around 3.03 shekels before the election and has since strengthened to approximately 3.10 shekels. Markets had anticipated an opposition victory, leading to a 3% drop in the dollar against the shekel at its peak. J.P. Morgan estimates that a change in government could have justified a shekel appreciation of 3% to 4.5%. The bank's fair value model places the dollar at 2.96 shekels, with the current 3.10-3.12 range reflecting a 5%-6% risk premium, considered reasonable given global uncertainties, AI stock volatility, and the increased likelihood of political deadlock or repeat elections. Official results are expected by November 4th. J.P. Morgan views a unity government led by Benjamin Netanyahu or repeat elections in early 2027 as more probable than a government led by Gadi Eisenkot.
Beyond election-related volatility, J.P. Morgan holds a neutral outlook for the shekel in the medium term, having recently downgraded its recommendation to neutral. The cost of holding shekel-denominated assets has surged to 2.1 percentage points, the highest since 2024, due to a widening gap between dollar and shekel interest rates. This, combined with the Bank of Israel's likely single remaining interest rate cut to 3% and a weakening correlation between the shekel and US tech stocks, is deterring institutional investors from shifting funds into the shekel. However, Israel's strong balance of payments, growing foreign direct investment, and growth driven by defense and high-tech industries provide some support. J.P. Morgan anticipates one more interest rate cut by the Bank of Israel, citing low inflation and a weak housing market.
