According to Bloomberg article published on February 26, 2023, analysts at Goldman Sachs Group Inc. are reluctant to call the worst is over for the shekel after a “significant” risk premium built up in the Israeli currency as a result of domestic political turmoil.
The currency’s close correlation with global technology stocks began to break in late January, a deviation that’s continued despite the central bank’s larger-than-forecast hike to interest rates this month.
The shekel’s volatility spiked this month, when it had one the worst performances among major world currencies against the dollar.
Goldman estimates that the Israeli currency now reflects a risk premium — which the US bank defines as the share of its cumulative performance that’s not explained by global market variables — at about 8%, according to a report late on Friday.
“While significant political premium now looks to be embedded in the Israeli currency, risks remain for the shekel over the short run,” a Goldman team including Kamakshya Trivedi said. “The broader shekel trend this month clearly reflects not just global developments, but domestic ones.”
Goldman is taking a less upbeat line on the shekel than the likes of Wells Fargo & Co., which believes the recent selloff is overdone and the specter of central bank intervention will likely set the stage for the currency’s rebound in coming weeks.
But tensions remain high over a judicial overhaul pursued by Benjamin Netanyahu’s government to reduce the authority of the legal system. Tens of thousands of Israelis have been demonstrating against the change, which protesters warn could undermine the country’s democracy.
In Place for Months
In the view of Barclays Plc, the risk premium, which it estimates at 5%-7%, “will remain in place until the judicial reform is finalized, which could take months.”
The shekel’s implied volatility versus the dollar is far above levels suggested by its historical relationship with the Cboe NDX Volatility Index, according to Barclays analysts Marek Raczko and Zalina Alborova. “We expect this gap to close, as the premium in spot is significant, and should stabilize,” they said.
For Goldman, the outlook also hinges on actions by the Bank of Israel, which in the past intervened to hold down the currency when a stronger shekel was a drag on consumer prices. It hasn’t waded into the foreign-exchange market for months, after buying more than $30 billion in foreign currency in 2021 to try to weaken the currency.
“It remains unclear if or when FX interventions will be part of the discussion around the shekel,” Goldman’s analysts said. “Tactical views on whether the currency will return to its ‘global tech anchor’ will require more clarity on expectations of domestic policy.”
