Bank of America- Merrill Lynch reiterates its recommendation to buy shekels in the wake of the interest rate hike by the Bank of Israel on Monday. "The central bank has underscored that the fundamentals underlying the shekel are now stronger, including support from monetary policy and a stronger macro outlook," Merrill Lynch said.
Merrill Lynch also raised its growth forecast for Israel to 0% from minus 2% in 2009 and to 2.5% from 2% in 2010.
"We are bullish on the shekel from a medium-term standpoint and forecast the currency to strengthen to NIS 3.40/$ by mid-2010, a call that may actually be too conservative at this stage, given the improvement in the currency fundamentals," it said.
Earlier this month, when the shekel-dollar exchange rate was at NIS 3.90/$, Merrill Lynch advised investors to take short positions on the dollar versus the shekel, predicting that the rate would fall to NIS 3.40/$ by June 2010, after which it would rise to NIS 3.45/$ over the subsequent months.
Now that the Bank of Israel has become the first Western central bank to raise its interest rate, and after it has stopped its daily dollar purchasing program, Merrill Lynch believes that the exchange rate could fall even lower.
The Bank of Israel has continued intervening in the foreign currency market, and has reportedly bought $500 million. Merrill Lynch says, "In the near term, it is likely that the central bank will step up its intervention in the foreign exchange market to try to offset the fundamental drivers pushing for a stronger shekel. This may generate some volatility in the near term, but we do not think that the central bank will sustain its foreign exchange intervention for a long time."
Merrill Lynch adds that it will probably soon slightly raise its interest rate calls for Israel, currently at 1% for 2009 and 2.5% for 2010.
Merrill Lynch adds, that as the Bank of Israel "aims to strike a balance between moderating inflation and supporting recovery, its case seems inspiring but still unique in EEMEA."
Other foreign investment houses also predict that the shekel-dollar exchange rate will continue to fall. Citi gives a target level of $3.70/$ by the end of 2009, and says that the exchange rate could fall even lower. Morgan Stanley says that the 25-basis point interest rate hike is not enough to suppress inflation, and that the Bank of Israel will make more rate hikes. It predicts that inflation will fall from the current 3.5% to 2.8% by mid-2010, and advises waiting until the Bank of Israel publishes the minutes of its interest rate decision on September 7 to decide where the interest rate is heading. Before the rate hike, Morgan Stanley predicted that the interest rate would be raised to 3% by the end of 2010.
Published by Globes [online], Israel business news - www.globes-online.com - on August 26, 2009
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