Israeli Shekel Forecast 2017

The Israeli Shekel, the ILS or locally known as the NIS, has been strengthening throughout 2016. Will this trend persist? Will Israel economy stay strong admist a global economy turbulence? We don’t think so. View our detailed Israeli Shekel forecast and predictions below. For more general predictions about the state of economy in 2017 view this piece about economic predictions for 2017.

Yield trends likely to nudge Shekel weaker in 2017

Overall, there is scope for a slightly weaker shekel on a trade-weighted basis during the first half 2017 as the Federal Reserve continues to raise interest rates and the ECB shifts towards a slightly less expansionary policy. Overall confidence in Israel’s fundamentals should remain strong and the Bank of Israel is also likely to raise interest rates slightly before the end of 2017 as inflationary pressures increase.

US political and economic uncertainty is liable to trigger higher volatility this year with some scope for a firmer shekel against the dollar over the second half of 2017 as US confidence fades.

Recommendations:

Pair Spot Jun 2017 Dec 2017 Hedging recommendation
USD/ILS 3.78 3.85 3.80 Sell near 3.90
EUR/ILS 4.06 3.97 4.29 Buy below 4.00
GBP/ILS 4.75 4.75 5.37 Buy below 4.70

If you need to hedge yourself against currency movements you can use FX options. To view the best companies – go to our Israel specific page – sending money to Israel from abroad.

US leap into the unknown

The US economy is growing steadily and remains close to full employment with unemployment at 4.7%. On current trends, the Federal Reserve is expecting to increase interest rates three times during 2017.

The election of US president Trump has caused major uncertainty across all aspects of the economy. Trump has pledged to boost growth through tax cuts and increased infrastructure spending while pledging to focus on increasing jobs.

This potential policy mix has increased fears of economic overheating which would force the Federal Reserve to tighten monetary policy more rapidly. Higher yields would provide dollar support, but there would also be increased fears over rising inflation which would undermine US yields in real terms.

A more aggressive trade policy could trigger near-term economic gains, but would risk important longer-term damage, especially with global retaliation risks.

There would also be increased fears surrounding a surge in the budget deficit and upward pressure on the trade deficit. If market confidence in the economy faltered, there would be the risk of sharp selling pressure on the dollar.

Big focus on the ECB

At its December policy meeting, the ECB announced that the government bond-purchase programme would be extended until the end of 2017 with the monthly purchase amount cut to EUR60bn from EUR80bn from April. The main refi rate was left unchanged at 0.0%.

The ECB remains committed to a very expansionary monetary policy in order to maintain upward pressure on inflation and push it towards the target of just below 2.0%. Policy will remain very loose in the short term, but growth trends have improved significantly and inflation rate have also moved higher with the headline rate at 1.1%.

The Bundesbank is increasingly uneasy over the rising inflation with the German rate likely to move above 2.0% during the first quarter of 2017.  Overall, there is likely to be increased pressure on the ECB to taper bond purchases before mid-year.

Political developments will be very important during the year. There are pivotal Presidential elections in France with the second round of voting in early May and German Federal elections are scheduled to take place in late September. The EU will also have to start exit negotiations with the UK which will be a major test of cohesion.

Further evidence of fragmentation would undermine the Euro while a boost for the centre ground would underpin sentiment. The Euro overall is substantially undervalued and any shift in sentiment could trigger a big reversal, especially in view of the structural current account surplus.

UK faces key political and economic tests

The UK economy performed much better than expected after the EU referendum with the Bank of England decision to cut interest rates helping to underpin consumer spending while the boost to competitiveness from a sharp decline in Sterling also helped cushion the economy. Inflation will rise strongly over the first half of 2017 and the Bank of England will face pressure to at least reverse the 2016 rate cut in order to curb inflation.

The growth in domestic demand is likely to be weaker as higher inflation erodes purchasing power, but exports should maintain a firm tone. There are also still important concerns surrounding the structural outlook with the risk of weak investment

Political factors will be very important with the government planning to trigger Article 50 by the end of March. The government will look to exit the single market and the EU negotiating stance will be crucial. Sterling sentiment will remain fragile, but long-term valuations are attractive.

Bank of Israel aims for stability

Israeli GDP rose 3.8% in 2016, boosted by a robust growth in the manufacturing sector, but consensus expectations are for a slowdown to around 3.2% for 2017.

The Bank of Israel left benchmark interest rates on hold at 0.1% at its January policy meeting and rates have been held at this level for close to two years.

Although inflation was slightly negative in 2016 at -0.2%, the central bank expects a recovery to 1.0% in 2017 due to a stronger trend in global prices and upward pressure on domestic wages. Given that house prices are still rising rapidly, there is an important risk that the Bank of Israel will need to tighten monetary policy during 2017.

The most likely outcome is a further widening of short-term yield differentials in the dollar’s favour as the Fed continues to tighten and, although the ECB will look to resist higher interest rates, there is a strong probability that policy will be tightened through a tapering of bond purchases. Overall, global monetary policy trends are likely to be less favourable for the Shekel during 2017.

International developments will be an important element with major uncertainty surrounding US political and economic policies. There will also be uncertainty over the US political stance towards Israel under the new Administration.

Pair Spot Jun 2017 Dec 2017 Hedging recommendation
USD/ILS 3.78 3.85 3.80 Sell near 3.90
EUR/ILS 4.06 3.97 4.29 Buy below 4.00
GBP/ILS 4.75 4.75 5.37 Buy below 4.70