The Israeli shekel fell to its lowest since April 2020
The exchange rate of Israeli shekel to USD on the international forex market has fallen to its lowest since April 2020. The USD/ILS pair rose 2.1% to 3.65 Israeli shekels per dollar at the high on February 21. The rise declined to 1.6% to 3.63.
According to Bloomberg calculations, the drop in the Israeli shekel was the steepest since September and the biggest decline among major world currencies. Fears over revision of the judicial system in the country had a negative impact on the rate, which outweighed the effect of the central bank’s interest rate hike.
On Monday, Feb. 20, the Bank of Israel raised its rate by 50 basis points to 4.25 percent, the highest level since late 2008. This was the eighth increase since last April, which affected the Israeli shekel-to dollar rate. Andrew Abir, deputy governor of the central bank, said that “political uncertainty” has affected the exchange rate of the national currency and stock markets.
He said that interest rates could be raised further as inflation remains above 5 percent. Inflation in Israel reached a 2008 high of 5.4% in January, exceeding the official annual target of 1-3%.
The Israeli Parliament (Knesset) on Monday approved the first reading of the first part of judicial reform. The bill changes the process for appointing Supreme Court judges and expands the government’s authority to select them.
Analysts at Citigroup (NYSE:C) expect the shekel to weaken further, predicting a drop of another 8% to 3.95 shekels per dollar. Despite a 50 basis point increase in the Bank of Israel rate, the currency continues to be under pressure from political news; Citigroup strategists Louis Costa and Bhumika Gupta said.
Earlier we reported that the dollar is stable as long as the Fed hawks are in control.
Sterling logs a second week of gains as rate outlook heats up
The pound headed for a second week of gains on Friday, boosted by the prospect of UK interest rates catching up with U.S. rates, as the Bank of England fights to bring down the highest inflation across leading economies.
Sterling GBPUSD is on track for a weekly rise of 0.7%, on the heels of last week’s 0.8% gain. The pound was last down 0.1% against the dollar at $1.2541 and flat against the euro at 85.89 pence.
Earlier this week the Organisation for Economic Co-Operation and Development said headline inflation in Britain will be at 6.9% by the end of this year, compared with an OECD average of 6.6%. This would leave UK inflation above that of Turkey and Argentina.
Inflation peaked at a four-decade high of 11.% in October and has since retreated to 8.7%, but this is still over four times the BoE’s target of 2%.
As other central banks reach the end of their respective monetary policy cycles, the expectation is the BoE still has further to go in raising interest rates, which could tilt the economy into a recession that it has so far avoided.
While this might be unwelcome news for bond or equity investors, it is theoretically supportive of the pound.
“Sticky inflation raises the prospect of more interest rate hikes from the BoE, in contrast to the Federal Reserve, which is widely expected to pause interest rate hikes in June with another possible rate hike in July,” City Index strategist Fiona Cincotta said.
Money markets are currently pricing in a peak of 5.5% for UK rates, up from 4.5% right now.
U.S. rates, by contrast, are at 5.25%, which traders roughly believe is at, or close to, the peak. Another 100 basis points in rises from the BoE would erode the appeal of the dollar among yield-hungry investors.
Against the euro, however, the picture is less bullish for the pound, according to ING strategists.
“We remain of the view that EUR/GBP will increasingly struggle to find more bearish momentum now that markets are already pricing in 100 bps of Bank of England tightening and the pair is already in undervaluation territory,” Francesco Pesole wrote in a daily note.
The euro has fallen by around 4.5% against the pound in the last four months and is trading around its lowest since mid-December.
The gap between sentiment and data
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Adam Smith, 18th century Scottish economist and father of modern economics, often referred to an invisible hand that moved free market economies to prosperity. This is perhaps the first mention of the behavioural aspect of economic decisions. We may pride ourselves as rational investors, but the fact is that sentiments play an important role in the decisions we make.
Many economic events, crises or virtuous ones, are at the root triggered by sentiment. This is the reason why policymakers pay close attention to sentiment indices, surveys that gauge what the public is feeling. These are doors and windows to economic data points and add the much-needed perspective to cold numbers.
One such index is the Reserve Bank of India’s consumer survey, which the central bank conducts several times a year. The consumer sentiment survey captures what Indians ‘feel’ about the current economic situation and about the future. It captures this feeling for five parameters ranging from income, inflation, employment to prices and spending.
India’s economy has recouped most of its pandemic losses in output and demand, albeit with some permanent scars. Are Indians feeling upbeat about this improvement?
The RBI’s consumer survey shows that sentiment over employment, income, purchasing power (inflation), and spending has improved dramatically from the depths of pessimism seen during the pandemic years. But optimism levels are far from pre-pandemic ones. For instance, when surveyed on employment, more consumers are pessimistic about their current situation when compared with pre-pandemic times. The proportion of people optimistic about future prospects is also low when juxtaposed with four years ago. The same is true for income. Less than a quarter of respondents said that incomes have increased and a little more than half believe that incomes will improve one year ahead. Before the pandemic hit, more than 60 percent believed in prospects of income improvement.
When people are not confident about incomes, they do not want to indulge in spending. This plays out on the spending responses as well. While essential spending is inelastic, discretionary spending has suffered. As our Chart of the Day shows, consumers are still not confident about fulfilling their desires of buying white goods, or going on a holiday etc.
Since India’s GDP has recouped its pandemic losses and most parameters are far higher than their pre-pandemic levels, what explains this gloom in sentiment? Has the pandemic broken something in consumers that cannot be fixed? Has it instilled a permanent austerity among Indians?
There are no straight answers unless another survey capturing the changing patterns of consumption is done. One explanation is that some segments of the economy suffered debilitating losses which cannot be recouped (scars from the pandemic). This involves small enterprises, shops that went kaput during the lockdowns. Since small businessmen had no income, their purchasing power as consumers is either reduced or gone. That shows up in weak private consumption expenditure. It also rings true as the K-shaped recovery continues.
The upbeat stock market, increased government spending and Indian conglomerates ready to invest big amounts backed by deep-pocketed bankers all point to a phenomenal recovery of the economy. The other side of the coin is the cautious individual householder who is yet to see a commensurate increase in his earnings. Money must flow from one segment to the other in an economy. Clogged pipes would mean that a party at one end would be spoiled by a disaster elsewhere.
If India’s GDP must match the exuberance of investors, it needs its consumers to open their purses. Until then, sentiment may not reflect data.
Asian currencies gain as Fed pause bets weigh on U.S. dollar
Asian currencies strengthened on Friday against a weak U.S. dollar, with Thailand’s baht leading the charge, after a jump in U.S. weekly jobless claims fuelled expectations of a pause in the Federal Reserve’s policy tightening cycle next week.
The Thai baht appreciated as much as 0.8% to a one-week high, though it is down 0.1% for the week. South Korea’s won, the Malaysian ringgit, and India’s rupee USDINR strengthened between 0.1% and 0.9%, respectively.
“The Fed looks set to pause in June, but with inflation remaining a concern the Fed is likely to hold a hawkish bias for some time,” analysts at ANZ said in a note.
“An upside surprise (in CPI) could bring a June hike back on the table.”
Market participants will keenly watch out for Tuesday’s U.S. consumer price index (CPI) data just a day before the Fed’s policy decision.
The number of Americans filing new claims for unemployment benefits surged to the highest in more than 1-1/2 years last week. The data led to a retreat in the U.S. dollar as investors took it as an indication of a slowing labour market.
The dollar index DXY eased 0.1% to 103.4.
In Turkey, the lira hit its lowest level on record, down as much as 1.8%, ahead of the expected appointment of a new central bank governor.
The currency, which showed an easing in its sell-off in the previous session, stood at 23.54 against the U.S. dollar by 0751 GMT.
Meanwhile, foreign investors bought $22.4 billion worth of emerging Asian ex-China portfolio assets in May, marking the largest inflows since April 2011, according to a report by Khoon Goh, head of Asia research at ANZ.
In the Philippines, the central bank said on Thursday it will cut banks’ reserve requirement ratios (RRR) to ensure stable domestic credit conditions, moving to offset the expiration of liquidity-enhancing relief measures for lenders during the pandemic.
The Bangko Sentral ng Pilipinas, however, reiterated that a lower RRR did not indicate a shift in its monetary policy stance.
The peso appreciated 0.1%, while stocks in Manila gave up 0.4%.
In Malaysia, factory output shrank by 3.3% in April, government data showed, below expectations of a 2% expansion according to 13 economists surveyed in a Reuters poll.
In India, the country’s chief economic advisor highlighted expectations of positive growth momentum in fiscal 2024, a day after the central bank kept lending rate steady but signaled that monetary conditions will remain tight to curb inflation.
Analysts at Barclays said they see no further interest rate hikes by the Reserve Bank of India, although the risk of another 25 bps hike lingers.
In China, inflation data, and particularly the producer prices, once again highlighted weakness in the manufacturing sector and an economy struggling for lift-off after COVID.
Equity markets in the region traded mixed, with shares in Thailand SET and Singapore STI retreating 0.3% and 0.1%, respectively. On the positive ledger, shares in Taiwan TAIEX and South Korea KOSPI advanced 0.9% and 1.16%, respectively.
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