Shekel is weakening. Forecast as of 01.11.2023


The longer the armed conflict in the Middle East lasts, the worse it will be for Israel’s previously thriving economy. The judicial crisis and the war with Hamas have plunged the shekel by 15% since the start of the year. Will the situation improve soon? Let us discuss the Forex outlook and make up a USDILS trading plan.

Weekly Shekel fundamental forecast

Despite the unprecedented $45 billion support promised by the Bank of Israel, the shekel collapsed to an 11-year low against the US dollar amid armed conflict in the Middle East. The formerly thriving $520-billion economy was subjected to two shocks at once in 2023: the judicial crisis and the war with Hamas. The USDILS has risen by almost 15% since the beginning of the year, turning the shekel into one of the worst-performing currencies in Forex.

Due to technology exports and abundant offshore natural gas discoveries, Israel’s per capita GDP has risen to $55,000, surpassing the UK, France, and Germany. Its economy moved to a permanent current account surplus, allowing the Bank of Israel to accumulate $200 billion in foreign exchange reserves. This is seven times more than in 2008.

Dynamics of shekel and Bank of Israel FX reserves 


Source: Bloomberg.

Forewarned is forearmed. Accumulating reserves seems like a necessity when a country is under threat of war. Once, it was supposed to unleash, and after the terrorist attacks, the central bank immediately tried to smooth out the volatility of the foreign exchange market with the help of a $45 billion shekel support program. According to officials, the scheme is too large for speculators to have anything to respond to.

In fact, currency interventions cannot discourage the USDILS bulls if an armed conflict costs the economy $2.5 billion monthly. JP Morgan predicts that Israel’s GDP could decline by 11% in the fourth quarter, and Bank Hapoalim estimates the costs of the conflict at 1.5% of gross domestic product, which seems too conservative. It all depends on the conflict duration and the involvement of other Middle Eastern countries.

Although markets appeared to have recovered from the initial shock, allowing USDILS to stabilize, the cost of hedging against further shekel drops has reached its highest level in three years. This can be seen from the changes in risk reversals — the ratio of premiums for put and call options.

Dynamics of shekel risk erversals

Source: Bloomberg.

The longer the armed conflict lasts, the worse it will be for the economy and currency. Perhaps JP Morgan’s forecast of a GDP decline of 11% looks too pessimistic, but maintaining the previous estimates of economic growth by the Bank of Israel at 2% in 2023 and 2024 is nothing more than an attempt to put a good face on a bad game. Only the conscription of 350 thousand reservists into the army, which is equivalent to 8% of the workforce, suggests an economic downturn.

Weekly USDILS trading plan

Judging by the government’s determination to destroy Hamas, a limited invasion of the enclave will be followed by a large-scale war. As a result, the risks of involvement of Hezbollah and Iran will increase sharply, and investors will flee Israel markets. Against this background, the USDILS can soar to 4.15 and 4.25. I recommend holding up long positions opened at the breakout of the 3.96 level and adding up to them on pullbacks.

Price chart of USDILS in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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