The Israeli Shekel has gained roughly 6% since mid-January. The Shekel has also been more resilient than other currencies when the dollar was gaining, and it has been performing well even when the dollar was weakening. All the while, Israel has been plagued with continual deflation, which is a classic case for unconventional measures. The Bank of Israel responded by slashing its benchmark interest rates to 0.1%. However, no “unconventional” measures were taken; no quantitative easing and no negative interest rates.
Investors, both local and foreign, reacted as they have in similar cases. That is by buying government bonds. Israeli government bonds yield 1.8% and in real terms, yield 2.5%, because Israel’s annual inflation rate is at a negative -0.7%. And with the demand for Israeli bonds high, the Israeli Shekel has strengthened as well, and so the cycle continues.
Demand for Israeli government bonds has been so high, in fact, that net foreign investment in Israeli government bonds over the past 3 months has been higher than it has been at any time in the past three years. Continue reading "Israeli Shekel Turning Japanese?"