Israel's currency, the shekel, has bounced back from its losses following the Hamas attack on October 7. Despite an ongoing war, there are signs that investors are returning to the country's markets.
In the days following the Hamas incursion that led to Israel's invasion of the Gaza enclave, the shekel experienced a significant drop to around 4.08 against the U.S. dollar - its weakest level in 11 years according to Bloomberg. Concerns arose that the conflict might escalate and involve other hostile states in the region, which would have severely damaged Israel's economy.
This prompted many investors to withdraw from Israel's assets, resulting in falling government bond prices, credit default swaps doubling in cost to insure Israel's debt against default, and the stock market plunging to its lowest point in over two-and-a-half years.
As of Thursday, the shekel (USDILS, +0.49%) was trading at 3.858 per dollar - only slightly weaker than its level before the initial Hamas attack. It has rallied approximately 5% since October 26.
Israel's Currency Supported by Central Bank
The Israeli currency has received substantial support from the country's central bank. To stabilize the shekel and provide liquidity to the market, the bank expressed its willingness to sell up to $30 billion of foreign currency in the open market and conduct swap transactions worth $15 billion.
Central Bank's Efforts
Last month, the Bank of Israel sold $8.2 billion, aimed at bolstering the shekel. However, the currency still remains over 9% weaker against the dollar in 2023.
Positive Trends
Israel's 10-year government bond yield, which experienced a sharp surge to 4.67% following the outbreak of the conflict, has now retreated to around 4.25%. Additionally, Israel CDS for five years have dropped by approximately 20% from their recent peak, although they remain high. Moreover, the Tel Aviv 125 equity index (XX:TA100) has successfully recovered almost half of the 13.5% dip that occurred after the Hamas attack. Interested U.S. investors can monitor the market's progress through the iShares MSCI Israel ETF (EIS).
Affirmation from Market Players
Gil Moshe, head of markets at Citi's Israel division, praised the Bank of Israel's proactive approach. He emphasized that market players gain confidence when they witness a sufficient amount of liquidity and see the central bank's readiness to intervene whenever required.
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