"The Bank of Israel has quickly moved to normal terms in the monetary policy that it is undertaking. It is acting faster than the market expected, and this speed reflects its confidence in the soundness of the Israeli economy," Barclays Capital head of emerging EMEA (Europe, Middle East, and Australasia)research Matthew Vogel told "Globes" in an interview.
Vogel was joined by Barclays Capital senior foreign exchange strategist Koon Chow, who added, "I believe think that its confidence has solid foundations. The latest rise in the State of the Economy Index by 1.2% is the strongest gain in recent months. The growth figures reflect the stronger than expected growth in the second quarter. It's important to emphasize that 1% growth may not be much in absolute terms, but many economies - both emerging and developed - have shown far worse performances."
"Globes": There are quite a few critics of the Bank of Israel's policies by people who claim that it doesn’t have a chance of beating the speculators.
Vogel: "It's now obvious that the Bank of Israel's unexpected interventions caused speculative investors to be more cautious when trading in the shekel. Nonetheless, the message we're getting from the market is that it doesn't matter what the Bank of Israel does, there is still a reason for investors to take long positions on the shekel.
"The Bank of Israel's activity has made investors a little more sensitive about trading in the shekel. The market is much more cautious than before. The Bank of Israel's activity may slow the shekel's appreciation, but it won't reverse the trend. What will reverse the trend is a macroeconomic change, which is not expected anytime soon."
What is your forecast for the shekel-dollar exchange rate at the end of the year?
Vogel: "We believe that the shekel-dollar exchange rate will be NIS 3.60/$ at the end of the year. It may reach that level sooner and more sharply. The interest rate hike by the Bank of Israel could attract more speculative investment, which is the most dangerous scenario as far as we're concerned. I think that the shekel could strengthen beyond this level."
For Chow, the Bank of Israel is in a very problematic position: on one hand, an interest rate hike is essential to keep inflation within the inflation target range; on the other hand, an interest rate hike will attract speculators to the market who will try to make carry trades in the shekel. In carry trades, investors borrow money in a currency with a low interest rate and invest it in currencies with a higher interest rate.
Chow says, "The Bank of Israel is in a difficult situation, but it could be called the troubles of rich people. We believe that it acted correctly during the crisis, and that it is acting quickly and correctly now, too, as we emerge from the crisis."
Israel and the shekel consequently stand out in Barclay Capital's list of regional preferences, alongside the Czech Republic. Chow says, "I mention Israel and the Czech Republic in one breath, because they have similar features. Both countries have small, open economies, with decision-makers who until now have acted correctly and rapidly."
Is the shekel is strengthening because of strong economic fundamentals or because of speculators?
Chow: "Behind every speculative transaction there has to be an economic factor. As we said before, especially in cases of growth, they exist in Israel."
Vogel: "It's clear to us that the Israeli economy has recovered sooner than other economies in the region. We believe that the same is true for Turkey, although it's taking longer there. East Asian economies also look good, and in Latin America, the Brazilian real still appears to be quite attractive."
Do you consider Israel as a developed or emerging market?
Chow: "In certain aspects, we consider it as a market that constantly moves between the definition of an emerging market and a developed market."
Published by Globes [online], Israel business news - www.globes-online.com - on September 17, 2009
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