Bethel Finance: Speculators back in foreign currency market

Bethel Finance news:
In the same week that Governor of the Bank of Israel Prof. Stanley Fischer attended a seminar to mark the publication of the report on "Israel and the Global Crisis", the attack on the shekel was renewed, and the local currency strengthened 2% within days. Fischer set out his "ten commandments" - the lessons from the last global crisis - and we will reflect on the sixth: the importance of the exchange rate to a small and open economy.

On this point, Fischer said, "There is no need to stress this point in Israel. There are people in the world who think that there should never be any attempt to influence the exchange rate, except through the interest rate. It is clear to me that the exchange rate is perhaps the most important economic variable, and there are countries such as Singapore which manage their monetary policy by setting the exchange rate or an exchange rate band, and let the interest rate adjust itself within this band… I think that the bottom line is that it is possible to intervene in the market during an appreciation, and that this can be done successfully."

Let me just add, it is not possible, Mr. Fischer, but essential to do so, but it should be done wisely and you must lead, not be hesitant or led.

The dramatic strengthening of the shekel in the past week was not extraordinary. During the same period, the Brazilian real, the Mexican and the Chilean peso, and a host of other currencies loved by global foreign currency traders, also greatly strengthened. Most of all, this is evidence of the return of the foreign currency trader to the field, after a fairly long period of quiescence. The big difference between the shekel and the other currencies is "accumulated fat". During 2011, these currencies weakened sharply, and contributed to their countries' exports. In contrast, the shekel kept in shape, weakening by just 5% against the basket of currencies.

The effect of the shekel's depreciation on exports is immediately apparent in the growth figures. In September-December, the shekel's weakness contributed to the export of goods and services, and the rise in the State of the Economy Index. This highlights Fischer's remarks about the critical importance of the exchange rate for economic growth.

Global economic activity is stagnant and 2012 is not shaping up well. Economic activity in the eurozone is expected to contract, and the growth rate in the US and emerging markets is slowing. The renewed attack should therefore sound alarm bells at the Bank of Israel, because in a year like this the exchange rate will have a critical effect on the profitability of exports and therefore on growth and the State of the Economy Index.

The most important datum is the identity of the players. During 2011, the Bank of Israel and the Ministry of Finance took a number of steps to limit the activity of foreign players, including the cancellation of tax exemptions and the obligation to report large transactions. The results, which appear to indicate success, can be seen in the Bank of Israel figures on the foreign currency market. The share of foreign traders fell from a peak of 65% of total trading volume in 2010 to 39% in late 2011.

It could be assumed that the Bank of Israel succeeded in its battle, but in fact, if you pay attention to the continued massive increase in trading volumes, especially in swap deals, the question arises, whom should we suspect is behind this increase? After all, economic activity has not increased at a pace to explain the increase in trading volumes. Nor have we heard about the sale of Israeli companies on a scale that might justify the increase.

Exporters have taken hedges and converted a substantial portion of their first quarter turnover, so they cannot be a major factor in the latest wave of conversions. Are there are local players who decided to enter the Israeli foreign currency game on a large scale? I doubt it, but this is worth checking out. But if we take into account the recent growth in speculative activity in many currencies in the world, it is possible to conclude with reasonable probability that foreign speculators have found a way to hide behind local parties in order to continue their activity in Israel while evading the restrictions imposed by the Bank of Israel and Ministry of Finance.

Monitoring the trading quotes and the high volatility in the shekel-dollar exchange rate on days when the dollar strengthens in international markets, compared with days when it weakens, leads to the obvious conclusion that speculators are again testing the level of intervention by the Bank of Israel and Ministry of Finance in the foreign currency market. As in Singapore, Switzerland, Japan, and Brazil, they should constantly make their presence felt, spring surprises, and show the players that they are the leaders and not the led.