Bank of Israel Interventions Reverse Shekel Selloff 

The shekel regained its footing as the central bank dueled short sellers to contain the market fallout from Israel’s conflict with militant group Hamas.

(Bloomberg) — The shekel regained its footing as the central bank dueled short sellers to contain the market fallout from Israel’s conflict with militant group Hamas.

The currency strengthened as much as 1% in the first half hour of trading on Tuesday and was little changed against the dollar as of 4:42 p.m. local time. The nation’s benchmark stock index, which slumped 6.5% on Sunday, rose as much as 1.4%, before paring gains.

The resolve by the Bank of Israel, backed by a $45 billion package of measures to smooth out volatility, succeeded in reining in wagers that seek to profit from any turmoil after a selloff took the shekel to the weakest in seven years. At stake is financial stability in an economy that’s bracing for shocks as the conflict between Israel and Hamas entered its fourth day.

“I don’t think there are many shorts being set,” said Peter Kisler, a London-based hedge fund manager at Trium Capital. “Fighting the central bank is probably not a good idea.”

Traders are wary of going against a central bank that’s amassed nearly $199 billion in reserves and devised a program of interventions it believed was “too big for speculators.”

Policymakers said on Monday they’d sell up to $30 billion of reserves to support the currency. That’s the size of its foreign-currency purchases in 2021 when it sought to rein in the shekel’s surge.

‘Solid Experience’

“An equivalent selling of US dollars should not have any meaningful impact on Israel’s solvency metrics,” Murat Toprak, a strategist at HSBC Holdings Plc, wrote in a note on Monday. “Israeli authorities have solid experience of intervention in the FX market.” 

The cost to insure the nation’s debt against default barely budged on Tuesday, a day after jumping 34 basis points to 93, the highest since 2016. The shekel slid as much as 2.8% on Monday before paring losses.

The central bank has also said it would provide liquidity to the market of up to $15 billion through swap agreements. Besides the possibility of rate hikes and expanding the scope of its existing program of interventions, policymakers could additionally opt to conduct bond purchases, a measure it used to support markets at the height of the global pandemic.

Before Saturday’s incursions by Hamas, the central bank had resisted supporting the shekel even as it slumped on investor concerns surrounding the government’s controversial efforts to weaken the power of the judiciary. 

The shekel is one of the biggest losers this year among a basket of 31 major currencies tracked by Bloomberg.

Pressure Points

History shows that the central bank might seek to prevent the currency from weakening past 4.05-4.10 versus the dollar, according to Coex Partners Ltd. The shekel had rebounded after reaching those levels in 2012 and 2015 and is currently around 3.95.

“The shekel will weaken if the conflict escalates,” said Henrik Gullberg, macro economist at Coex Partners Ltd. But “the interventionist Bank of Israel is likely to want to prevent a meaningful further depreciation in the shekel.” 

But even factoring in the central bank’s efforts, Wells Fargo still expects the shekel’s exchange rate to “trend toward” 4.15 by early 2024 “as the current shock scenario continues to unfold.”

“We believe another 5% shekel depreciation could still be forthcoming by the end of this year and into early 2024,” said Brendan McKenna, an emerging market strategist at Wells Fargo in New York. “Risks are, however, tilted toward a sharper and quicker depreciation.”

–With assistance from Kerim Karakaya.

(Updates with Wells Fargo comments in final two paragraphs)

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