BoI Launches Third Salvo Against Forex Speculators

The moves over the past month and a half have bolstered the dollar against the shekel from as low as NIS 3.53 to as high as NIS 3.71 on Friday.

The Bank of Israel has launched yet another attack on speculators: Its supervisor of banks issued a new directive yesterday requiring Israel's banks and foreign banks operating here to divulge their balances in foreign-currency and foreign-currency derivative transactions. And they will have to do this in deep detail.

Stanley Fischer
Moti Kimche

The reports will be monthly. Currency-market sources say it's the Bank of Israel's latest move against speculators who have boosted the shekel in the last two years, to the dismay of exporters.

It's actually the Bank of Israel's third move. The first, on January 19, required banks to report transactions in foreign-exchange swaps and forwards of more than $10 million in one day. But this hasn't been turned into a binding directive yet.

The very next day the central bank said in its second move: "From January 27, 2011, banking corporations in Israel will have to meet a reserve requirement for foreign-exchange-derivative transactions by nonresidents," the central bank said. Its amendment to the Liquidity Directives went into effect on January 27. The amendment imposes a 10% reserve requirement on banks for foreign-exchange derivative transactions with nonresidents' forex swaps and forwards.

The moves over the past month and a half have bolstered the dollar against the shekel from as low as NIS 3.53 to as high as NIS 3.71 on Friday. Yesterday the representative rate was set at NIS 3.68, in volatile trading.

At the beginning of trading yesterday, the dollar weakened against the shekel on expectations of interest-rate rises after the weighting of housing costs increases in the consumer price index. Yesterday's central bank announcement moderated the dollar's decline.

In after-hours interbank trading, the dollar was near NIS 3.69. The euro declined as well against the shekel. Yesterday's representative rate was set at NIS 4.98, for a decline of almost 1.7% on the day.

Foreigners have bought up huge amounts of short-term Bank of Israel notes (makams ); their holdings are approaching 30% of all makams in circulation. The chief economist at Meitav Investment House, Ron Eichel, called yesterday's announcement "a continuation of regulations that [the central bank] issued last month."

According to Eichel, "The Bank of Israel is trying to study the sector and the effect of its actions while [the actions] are happening. The bank continues to toughen conditions for the banks .... Now they are obligated to document the various transactions. There is apparently a lack of clarity on the scope of the activity and operations, and it's possible the Bank of Israel also lacks information linked to interest-rate considerations and therefore issued the new instructions."

Eichel remains firm in his stance that the central bank's moves will not necessarily weaken the dollar, saying Israel's macroeconomic figures are simply better than those elsewhere around the world.

He says the shekel is expected to overcome the fallout of the Egypt crisis, which helped strengthen the dollar in recent days. He says the talks among the various sides in Egypt will help maintain stability in the region. He expects the shekel to strengthen in the coming months.