BoI Abruptly Exits FX Scene

The Bank of Israel announced yesterday it would exit Israel's foreign currency market, effective today. After just over a year of buying $100 million every weekday, and $50 million on Fridays, the central bank abruptly announced that it's done. However, it left itself free to act in the foreign exchange market when it discerns "unusual movements in the exchange rate which are inconsistent with underlying economic conditions", or "when conditions in the foreign exchange market are disorderly."

Market players had been asking, with increasingly strident tones, when and how the Bank of Israel meant to cease its intervention. Now they know.

"It is the natural, right move," said Ron Eichel of the investment firm Meitav. "[BoI Governor Stanley] Fischer is intensifying the uncertainty in the market, which should prevent speculation. But at this stage it's hard to say what the exchange rate will do. No question about it, Fischer's move took everybody by surprise. The market had expected a gradual exit."

The technical reason for stopping is that Israel's foreign currency reserves passed the $54-billion mark, while the ideal maximum (according to the Bank of Israel itself) is in the range of $40 billion to $44 billion. At this time, the central bank says, its new policy of dipping into the marketplace if and when it thinks action necessary will better serve Israel's economic needs. It also clarified that it has no intention of acting against global exchange rate trends.

In other words, for a year the central bank's policy has been transparent, and that will no longer be the case. It won't be announcing when it buys dollars and won't say how much, either. But each month, at around the 5th of the month, it will publish a brief announcement saying how much it bought, if anything, over the previous month.

In fact the Bank of Israel suddenly leapt into the forex arena in April, 2008, saying it had noticed a market failure. In June, 2008, it started steadily buying $100 million a day; Its movements increased Israel's foreign currency reserves by $22 billion.

On August 3 of this year the central bank said it would continue buying $100 million on weekdays, Monday through Thursday, and $50 million on Fridays. But if it saw market failures, it said, it would buy more. Last week the Bank of Israel bought somewhere between $1.5 billion to $2 billion worth of dollars, boosting the greenback by 3.2% against the shekel.

Analysts yesterday suggested that Fischer was taking advantage of a narrow window of opportunity to get out of the market. The dollar had gained ground in world markets and in Tel Aviv, and while Fischer and others think it may weaken again, it shouldn't do so dramatically.

However, yesterday the central bank was prepared to intervene massively to prevent the dollar from diving against the shekel. By mid-afternoon, said one market trader, it had bought up between $100 million to $200 million.