Merrill Lynch and Morgan Stanley have recommended to their clients last Thursday and Friday to go long on the Israeli shekel. This after the Bank of Israel intervened to prevent a soaring shekel in January, by buying $1.8 billion.
The result of the bank’s exceptionally large single purchase was a steep decline in the value of the shekel, from just over 3.3 NIS to the dollar to as much as 3.5.
A weaker shekel is essential to Israeli industry, both domestic and exports. Globes cited Governor of the Bank of Israel Karnit Flug who claimed the Bank had detected “extraordinary activity” of mostly algorithmic funds to buy shekels, which is why she decided to buy so many dollars – to deliver a message to speculators: if you buy more shekels, we’ll make you lose your investment.
But Merrill Lynch showed it doesn’t scare easy, and on March 1 it recommended to its customers to keep buying shekels.
As if baiting the Flug bank, the Merrill Lynch review read: “Under the current leadership, the Bank of Israel has never bought more than $2 billion, and hardly ever more than $1 billion, suggesting no appetite to fight the current account trends.”
The Merrill Lynch analysis also suggested that “the Bank of Israel’s passive intervention […] stacks up quite low vs inflows ($6.6 billion in purchases in 2017, compared with $11 billion in capital inflows during the year).”
Here’s the zinger: the Merrill Lynch and Morgan Stanley recommendations were published following a meeting with the Bank of Israel suggests the Flug Bank’s message was not scary enough, and at this point Israeli officials must buy a whole lot more dollars to offset the gorging investments which are putting Israeli exports at risk. Since 2008, when the Bank of Israel began its large purchases of US dollars, it has yet to resort to radical steps of that kind.