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Analysis: Inflation may persuade Bank of Israel to embrace shekel strength

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November 9, 2021

By Steven Scheer

JERUSALEM (Reuters) – It has taken $50 billion and two years but the Bank of Israel may have finally accepted it is time to pare interventions and let the shekel juggernaut roll on.

What might be changing the equation – alongside the healthy 7% GDP expansion expected this year – is inflation which is gradually inching towards the top of the official target.

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So without entirely abandoning interventions, the central bank is expected by economists to sharply cut back on forex purchases, a strategy adopted years ago to curb the relentless shekel appreciation.

The shekel on Monday hit 3.08 per dollar, the highest since 1996.

It is the top performing emerging currency since the pandemic started roiling financial markets in early 2020, up 10%, while gaining 12% against its main trading partners. The shekel has gained nearly 4% in the year-to-date, making it one of the top three 2021 emerging currencies.

All this despite Israel – unlike many other developing countries – having yet to raise its 0.1% interest rate.

(For graphic on Emerging currencies since the start of the pandemic: https://fingfx.thomsonreuters.com/gfx/mkt/dwpkrealzvm/Emerging%20currencies%20since%20the%20start%20of%20the%20pandemic.PNG)

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The shekel’s strength has been attributed to a number of factors as well as the overall weakness of the dollar: a rapid economic recovery from the COVID-19 crisis amid a widespread vaccination programme; a large current account surplus that is expected to reach 5.5% of GDP in 2021, thanks in part to Israel’s tech firms; and huge foreign direct investment in the sector that may hit $30 billion this year.

Gains in overseas stock markets also often lift the shekel because Israeli pension funds and other institutions are required to cap their foreign currency exposure. That has forced them to sell $20 billion into the market this year.

INFLATION EQUATION

“You have all these factors and to expect the Bank of Israel to try and prevent a sharp shekel appreciation is not realistic,” Jonathan Katz, chief economist at Tel Aviv brokerage Leader Capital Markets said, adding it was possible to infer from comments by BoI governor Amir Yaron that he prefers to not intervene.

Yaron took office in late-2018 and stayed on the sidelines in 2019, ignoring an 8% shekel surge and an outcry from exporters. But he intervened last year as the pandemic necessitated support.

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Now the picture is different, with the central bank expecting growth of 7% this year.

“His world view is when the economy is recovering and we’re in good shape … there’s less need to intervene. But there will be pain for exporters,” said Katz, predicting dollar-shekel likely at 3 by year-end.

Katz likens Israel’s booming high-tech sector to the country’s natural gas sector in 2013, when the BoI also bought dollars of try to offset the sector’s impact on the surging shekel. Without sufficient offset for that one sector, other exporters suffer, he said.

(For graphic on Israel current account and foreign direct investment: https://fingfx.thomsonreuters.com/gfx/mkt/zdpxonrjjvx/Israel%20current%20account%20and%20foreign%20direct%20investment.PNG)

Earlier this year, Yaron seemed to be following the route set by his predecessors whose intervention campaigns have pushed BoI reserves to a record 47% of GDP. After buying $21 billion last year, the BoI announced up to $30 billion of forex purchases for 2021.

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But last week, Yaron called the $30 billion programme, which ended on Oct. 27 when it hit that level, an “exceptional plan for exceptional times”. BoI said it would not extend the programme, instead reverting back to unannounced interventions when deemed economically necessary.

EXPORTER CONCERN

Modi Shafrir, chief strategist at Mizrahi Tefahot Bank’s finance division, expects interventions to decline in 2022, given Israel’s 2.5% inflation print in September — towards the upper end of its annual 1%-3% target.

“At the beginning of 2021, we had deflation and … now, we are in a different, very different area,” Shafrir said. “The shekel appreciation slightly reduces the inflation coming from the supply side.”

(For graphic on Israel interest rate inflation and the shekel: https://fingfx.thomsonreuters.com/gfx/mkt/gdpzydwjevw/Israel%20interest%20rate%20inflation%20and%20the%20shekel.PNG)

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The central bank has created a process that allowed the economy to gradually adapt and move to a services focus, away from production, Yaron told reporters last week, adding:

“The monetary policy committee looks at exporters but also at importers and consumers. The macroeconomic picture of the economy emerging from the crisis a good one.”

Unannounced interventions — and there have been a few recently according to traders — prevent episodes of excessive strength while allowing gradual gains, Goldman Sachs wrote, predicting “continued, gradual shekel appreciation”. They forecast a 3.05 rate in six months.

Israel’s high-value tech exports, comprising 14% of GDP, are relatively insulated from exchange rate swings, but Yaron’s comments and actions have not sat well with other exporters.

Israel Chemicals for instance said the currency strength hurt operating profit by $17 million in the third quarter over a year earlier.

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Ron Tomer, head of Israel’s Manufacturers’ Association, said a third of manufacturers had shifted some production overseas “and it keeps on growing”.

“Until the latest shekel move, a lot of companies were selling at cost or even at small losses,” Tomer told Reuters. “Now with the shekel at 3.10 … we reached a point in which people can no longer dip into pocket money.”

He urged policymakers to continue interventions and the government to step in, because “when you have the shekel strengthening 3% in a week, you can’t sustain any plan”.

(Reporting by Steven Scheer; Additional reporting by Karin Strohecker in London; Editing by Sujata Rao and Alison Williams)

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Apple starts legal action against Russian regulator in App Store dispute -RIA

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December 6, 2021

MOSCOW (Reuters) – Apple has started legal proceedings against Russia’s anti-monopoly regulator in a dispute concerning alternative payment options on its App Store platform, the RIA news agency reported on Sunday citing court filings.

Russia opened an antitrust case against Apple in late October, accusing it of failing to allow app developers to tell customers about alternative payment options when using its App Store. It said Apple could face a fine based on its revenue in Russia if found guilty.

In documents published on Dec. 1, the Moscow Arbitration Court listed Apple as a claimant and Russia’s Federal Anti-monopoly Service (FAS) as a defendant in “economic disputes over administrative legal relations.”

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Apple, which did not immediately respond to a Reuters request for comment, demanded that additional documents be added to the case on Dec. 2, RIA reported.

Forbes Russia cited a FAS representative as saying that the proceedings related to a warning it issued on Aug. 30 over Apple’s alleged failure to inform users they could also pay for purchases outside the App Store.

The FAS did not immediately respond to a request for comment.

Apple faced pushback over its App Store rules in the United States in September when a federal judge issued a ruling forcing the company to allow developers to send their users to other payment systems.

(Reporting by Alexander Marrow; Editing by Andrew Osborn)

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Weaker foreign demand sinks German industrial orders in October

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December 6, 2021

By Michael Nienaber

BERLIN (Reuters) -Weaker demand from abroad drove a much bigger than expected drop in German industrial orders, including cars, in October, data showed on Monday, further clouding the growth outlook for manufacturers in Europe’s largest economy.

A pandemic-related scarcity of microchips and other electronic components has caused massive supply bottlenecks and production problems in Germany’s mighty automobile industry and other important sectors of the economy.

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Orders for goods ‘Made in Germany’ dropped 6.9% on the month in seasonally adjusted terms after a revised rise of 1.8% in September and a plunge of 8.8% in August, figures from the Federal Statistics Office showed.

A Reuters poll of analysts had pointed to a smaller decline of 0.5% on the month in October.

“After incoming orders climbed to an all-time high in mid-2021, the index has lost more than 16 points in recent months,” the economy ministry said, adding that the second sharp decline within three months put a further damper on the economic outlook.

Excluding distorting factors from bookings for big ticket items such as planes, industrial orders were still down 1.8%, the data showed.

The drop was driven by a decline in foreign orders of more than 13% on the month, with demand from countries outside the euro zone such as China particularly weak. Orders from domestic clients rose 3.4%.

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“New lockdowns in Asia are slowing industry in Germany,” VP Bank analyst Thomas Gitzel said. He added that the current wave of coronavirus infections across the globe was putting a renewed burden on the world economy.

Gitzel said that domestic demand should remain strong, helped by the new ruling coalition’s commitment to massive investment in the green economy.

“The decarbonization of the economy requires major investments in new technologies. German industry can and will benefit from this,” Gitzel said.

The weak orders data suggest that manufacturing will hamper overall economic growth in the coming months, with analysts expecting stagnation at best in the final quarter of this year.

(Reporting by Michael Nienaber, editing by Kirsti Knolle and Philippa Fletcher)

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Marketmind: Chasing the Omicron dip

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December 6, 2021

A look at the day ahead from Julien Ponthus.

Buying the dip triggered by the Omicron COVID-19 variant across global markets has proven a costly strategy so far. But some investors seem determined to have another go.

European and U.S. stocks futures are trading sharply higher after ending last week on a sour note and notwithstanding a dismal day in Asia where an MSCI index of Asia-Pacific shares outside Japan lost about 0.9%.

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The region has seen a series of corporate setbacks after ride-hailing giant Didi decided to withdraw from the New York stock exchange last week.

Shares in China Evergrande, the world’s most indebted developer, plunged 14% after it said there was no guarantee it would have enough funds to meet debt repayments.

Another giant, Alibaba dropped 5% after announcing it would reorganise its international and domestic e-commerce businesses. And U.S. regulatory opposition to the sale of Softbank-owned chip firm Arm pushed the Japanese conglomerate 8% lower.

But the mood is lighter already across Europe, allowing 10-year Treasury yields to claw back some of Friday’s falls which took them below 1.4% for the first time since late September.

There are five trading sessions left before Friday’s U.S. consumer price report which some reckon will provide the green light for the Federal Reserve to accelerate its tapering of bond purchases.

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Oil prices too rose by more than $1 a barrel after Saudi Arabia raised prices for its crude sold to Asia and the United States.

And if the market mood is perking up, there is no sign of that in Bitcoin which has fallen further and is now at $48,244 — some $20,000 below peaks hit a month ago.

Key developments that should provide more direction to markets on Monday:

-Vivendi is open to discuss with Rome over state control on TIM’s network

-Alibaba overhauls e-commerce businesses, names new CFO

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-Swiss National Bank Vice Chairman Zurbruegg to retire in July 2022

-Weaker foreign demand sinks German industrial orders in October

-CBI cuts UK economic growth forecasts on supply chain hit

-Euro zone finance ministers to discuss 2022 draft budgets, euro summit

– Russian President Vladimir Putin visits India

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– UK construction PMI/new car sales

-Euro zone finance ministers to discuss 2022 draft budgets, euro summit

BOE deputy Governor Broadbent, ECB Governor Lagarde and board member Panetta speak:

(Reporting by Julien Ponthus; editing by Sujata Rao)

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