USD/ILS: The shekel is due for a correction – Wells Fargo

The Israeli shekel (ILS) has fought back against an aggressive Bank of Israel (BOI) foreign exchange intervention program and is currently stronger than pre-intervention levels, explain analysts at Wells Fargo. However, they see the shekel as due for a correction, as renewed dollar strength and a new intervention program are likely, which should push the currency weaker over the coming months.

Key Quotes: 

“Most of our currency-related models and frameworks identify the Israeli shekel as one of the least vulnerable and low volatility emerging market currencies. Our currency tools identify Israel as having strong underlying economic fundamentals and stable local politics, making the shekel somewhat insulated from any unforeseen shocks to global financial markets.”

“In our view, the shekel has overshot to upside and the currency is likely to experience a correction in the near future. We base this view on two factors: 1) broad U.S. dollar strength and 2) BOI policymakers initiating another FX intervention program.”

“We also believe the central bank will become increasingly worried about the overall strength of the shekel and will look to get more active in foreign exchange markets after the current intervention program officially ends.”

“Using prior levels as a guidepost, a USD/ILS exchange rate at ILS3.11 could be where BOI policymakers once again look to resist against the shekel getting much stronger.”

“The combination of renewed dollar strength and another BOI intervention should push the USD/ILS exchange rate weaker over the coming months. To that point, we expect the shekel to weaken back toward ILS3.20 by the beginning of Q2-2022.”

“Over time, we expect the shekel to once again gradually strengthen as markets focus on Israel's persistent current account surplus, stable politics and strong institutional framework.”