The Shekel is waking up on the back of some hope of a political conciliation.

TL;DR

In a previous piece, we proposed that the pronounced depreciation of the shekel was not primarily driven by fundamental economic factors, but by the pervasive uncertainty stemming from the ongoing debate about judicial reform. This situation, we argued, opened a unique window of opportunity for entry into the real estate market. The combination of pressure on property prices and the significant undervaluation of the shekel created an optimal point for investment.

So, what’s our stance now? Our perspective remains the same. Interestingly, a small spark of optimism over the resolution of the political deadlock gave the shekel a 1% boost overnight. This development underscores two key points:

Firstly, Israel’s economic foundation remains solid, and secondly, the market is heavily short the shekel, which heightens the potential for a short squeeze.

This is not to overlook the challenges ahead. A range of factors could still push the shekel further down. However, we’re starting to see promising signs of value appreciation in Israel’s real estate sector, particularly for foreign investors.

tel aviv weak real estate and currency prices

The Israeli shekel experienced a 1% rise, hitting a fortnight’s peak against the dollar this Wednesday. This comes as market participants foresee positive developments in discussions around the country’s debated legal system reforms.

The national currency of Israel strengthened to 3.65 against the dollar, its most robust level since May 22. This strength followed Prime Minister Benjamin Netanyahu’s statement two days prior, which acknowledged the re-emergence of legal reforms on the political agenda. However, he also emphasized his intention to find middle ground with the opposition. The reforms, initially proposed in January, sparked political unrest, mass demonstrations, and caused investors to retreat. Consequently, this negatively impacted growth forecasts, depreciated the shekel, sustained high inflation rates, and resulted in additional rate increases from the Bank of Israel.

The shekel dipped to a three-plus year low of 3.753 per dollar just last Friday.

In the coming week, the parliament is projected to vote for two politicians to serve on a committee responsible for selecting judges, including those for the Supreme Court. This court serves as one of the key regulatory mechanisms in Israel’s political landscape. Analysts suggest that one of the potential appointees could be from the opposition, signifying possible successful compromise discussions. This would also be a blow to the hardliners in Netanyahu’s religious-nationalist government who aim to gain greater influence over judicial nominations.

Chief Economist at IBI Investment House, Rafi Gozlan, commented that market apprehension regarding the legal reform plan might lessen if an opposition member becomes part of the committee. He noted that the shekel’s depreciation over the past two weeks has almost entirely been reversed due to this potential development.

However, he cautioned, “the situation remains quite volatile, as the market’s confidence in the government is somewhat shaky.”

Gozlan further explained that if this turned out to be a political maneuver rather than genuine steps towards compromise and retracting the original legislative proposals, the risk premium could surge quickly, leading to a swift devaluation of the shekel. Even though the shekel has appreciated by 3% this week, the currency remains 6.5% weaker against the dollar over the previous six months.

In the previous week, the Governor of the Bank of Israel, Amir Yaron, warned that further devaluation of the shekel could potentially trigger more rate hikes.

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sources : CBS, BOI, own research

Political volatility, especially when persistent will affect the economic fundamentals, no doubt. Further depreciation of the shekel will force of the hand of the Governor of the Bank of Israel to increase the interest. However, we firmly believe in the resilience of the economy and the real estate market and in the transient nature of the current crisis.

Published February 19, 2024