Foreign Investors Eye Israeli Dollar Drop to 3 Shekels on Government Stability

Representatives from Bank Hapoalim met with hedge funds and foreign banks in London last week, where a clear message emerged: if Gadi Eisenkot succeeds in forming a government, most investment managers anticipate the dollar will fall to around 3.0 shekels. This assessment comes from a review by Mody Shpirer, Chief Strategist for Financial Markets at Bank Hapoalim.

Shpirer noted that Israeli politics dominated nearly every meeting. Foreign investors are well-acquainted with the political landscape and are awaiting clarity before increasing their exposure, emphasizing that government stability is as crucial as its formation. Opinions on Eisenkot's chances are divided, with one economist estimating a 50% likelihood of him forming a government and a 50% chance of repeat elections, while others are more optimistic.

In a positive scenario, a sharp reaction is expected in the foreign exchange market, accompanied by a broad decrease in risk premiums, bond yields, and basis swaps, alongside a rise in local stock indices. One foreign bank trader even sees a possibility of the shekel strengthening to below 2.85 per dollar. Conversely, another round of elections could prolong negative sentiment towards Israel, reduce investment volumes, and in an extreme case, lead to sanctions on the economy and financial system.

Foreign positions in the local market are currently very low due to political uncertainty and a difficult year for the hedge fund industry, which has seen many firms lose money in Hungary, Brazil, and Israel. This means that if the positive scenario materializes, significant capital could flow into the market, leading to a rapid appreciation. If not, there are few existing positions to be closed under pressure.

Another concern for investors is a sharp decline in the Nasdaq and AI stocks. The Israeli tech sector is now more diversified than during the dot-com bubble, so a weakness solely in AI stocks is unlikely to severely impact the economy. However, a significant drop in the entire Nasdaq would affect both high-tech and the shekel. Institutional investors were also discussed; if a government is formed and the shekel strengthens, they are expected to slightly reduce their foreign currency exposure, currently at 20-21%. If the likelihood of new elections increases, the shekel would weaken, and institutions would increase their exposure.

London-based assessments suggest that the Bank of Israel will not lower interest rates soon, with few expecting a cut at the November 23 decision. Some investors believe the IRS market, which trades expected future interest rates, has priced in a rate of 3.75%-4% in about five years, which they consider too high. While many were impressed by strong growth alongside low inflation, others questioned how a 7.5% growth forecast for 2027 aligns with only a 2.1% inflation forecast.