Flug News Conference Rattles Markets for a Second Day

Dollar continues lower while bond prices tumble as economists and trader try to parse Bank of Israel governor’s views.

Emil Salman

Bank of Israel Governor Karnit Flug rattled the currency and bond markets for a second day on Tuesday, with the dollar and euro sinking lower, and government bond prices marking a second day of big drops.

The dollar lost 1.4% to a Bank of Israel rate of 3.779 shekels, it lowest since last October, even as the U.S. currency was stronger globally. In late trading it sunk ever further to 3.7682. The euro, meanwhile, tumbled 2.6% to a Bank of Israel rate of 4.2368 and was at 4.2124 late in the day.

In Tel Aviv Stock Exchange trading, share prices were higher most of the day before losing ground in the final two hours. But in the fixed-income market, prices fell sharply for a second day. The government’s 10-year shekel dropped 1.14% to raise its yield to 2.6%. The price of the shekel bond due in in 2024 took a bigger hit, dropping 2.14% to leave its yield at 3.57%.

The Bank of Israel left its key lending rate on Monday unchanged at 0.1%, as expected, but Flug roiled markets with her first-ever monetary progress conference after the rate decision was announced late in the day, by suggesting that the central bank wasn’t committed to weakening the shekel by lowering interest rates further or engaging in quantitative easing.

“If the goal of the press conference after the rate announcement was to explain policies and enhance market certainly, the results were exactly the opposite,” said Alex Zabezhinsky, economist at Meitav Dash, in a note to investors Tuesday. “The messages the Bank of Israel gave were contradictory, unexpected and unclear.”

Flug had been saying in recent months that she was ready to take action to prevent the shekel from strengthening by either employing negative rates or QE, a policy of buying government bonds to increase liquidity in the economy.

But on Monday Flug signaled that the central bank was now less likely to use what she called “unconventional tools” anytime soon, citing an improved inflation outlook and reasonable levels of economic growth. While she noted export weakness and the shekel’s recent strength, she indicated they were to do with global trends.

Ofer Klein, head of economics and research at Harel Insurance & Finance, said the comments may have come off stronger than Flug intended, so the bank was likely to respond with “continued foreign exchange purchases and more dovish statements in the future.”

According to the Bank of Israel’s own outlook released on Monday, the key rate will remain unchanged through 2015 and gradually start rising in 2016.

“It’s still data-dependent, but [Flug] clearly is thinking [the easing cycle] is over,” Barclays economist Daniel Hewitt told Reuters. “She is trying to make it to the point where the [U.S.] Fed starts raising rates and then it will be easier for [Israel’s central bank].”

However, Goldman Sachs economist Kasper Lund-Jensen said the market overreacted to Flug’s remarks, and kept his call for a cut to zero rates in the second half of the year.

Nevertheless, Eyal Cohen, CEO of Si Capital, said he expected the dollar to continue to weaken so long as the Bank of Israel doesn’t intervene in the markets, saying its next support level was 3.735.

In fact, it was the Finance Ministry that stepped into the currency market on Tuesday, conducting two shekel-dollar hedging operations totaling $50 million. The treasury’s accountant general’s office said it conducted a similar operation for $90 million the day before, when the dollar first weakened on the back of Flug’s remarks. The hedging operations are done to reduce the government’s $26 billion foreign debt to fluctuations in the exchange rate.

In TASE trading Tuesday, the benchmark TA-25 index ended down 0.5% at 1,689.19 points while the TA-100 lost 0.6% to 1,452.52, on turnover of 1.24 billion shekels ($330 million).

Real-estate shares, which are highly sensitive to interest rates, were hardest hit, with Norstar leading TA-100 stocks down on a 4.7% decline to 90.01. Eliezer Fishman’s Jerusalem Economy lost 4.4% to 14.65, and Property & Building Limited fell 4.1% to 283.60.

With reporting by Moti Bassok and Reuters.