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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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Buying the Omicron dip

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November 29, 2021

A look at the day ahead from Danilo Masoni.

Sell first, get answers later. With stocks near lifetime peaks, the Black Friday reaction to the new fast-spreading virus strain Omicron was hardly surprising.

But a weekend later, investors look heavily engaged in buying the dip, as markets take a more balanced view of risks attached to what the WHO called a “variant of concern”.

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After their ninth biggest drop ever on Friday, gains in crude prices topped 5% earlier in Asia and stock futures point to a solid bounce across Europe and America.

A South African doctor said patients with Omicron have “very mild” symptoms and investment houses don’t look to have budged that much. Credit Suisse, for example, made no portfolio changes, staying slight overweight on equities.

Perhaps more telling is that retail traders poured north of $2 billion into U.S. stocks on Friday, setting the second biggest daily inflow on record, per Vanda Research data.

Of course there are uncertainties and that will likely make for volatile days heading into the Christmas shopping season.

Understanding the level of severity of the variant “will take days to several weeks”, said WHO. And vaccine maker BioNTech needs up to two weeks to figure out whether the shot it makes with Pfizer needs to be reworked.

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So while Omicron has spread from Australia to the Netherlands and governments ban travel and mull lockdowns, markets may also gamble on central bankers turning more patient in their path towards rates normalisation.

Lots of speakers from the Federal Reserve and the European Central Bank are lined up for today. On Sunday, speaking about risks to the recovery, ECB’s Lagarde said: “We now know our enemy and what measures to take.”

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

* ECB speakers: Governor Lagarde, ECB board members AndreaEnria, Isabel Schnabel, Pentti Hakkarainen; ECB Vice PresidentLuis de Guindos * Euro zone consumer sentiment/inflation expectations * German preliminary CPI/HICP * Fed speakers: Chairman Jerome Powell, New York PresidentJohn Williams, Governor Bowman * Emerging markets: Kenya central bank meets; Turkey tradebalance and bank NPL ratios (This story refiles to fix chart)

(Reporting by Danilo Masoni; Editing by Saikat Chatterjee)

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UK regulator set to block Meta’s Giphy deal – FT

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November 29, 2021

(Reuters) -The UK competition regulator is expected to block Meta Platforms’ acquisition of online GIF platform Giphy in the coming days, the Financial Times reported https://www.ft.com/content/662c8e3f-4909-4bec-9131-c0237bb4897d on Monday.

The Competition and Markets Authority is set to reverse the deal in what would be the first time the watchdog has reversed a Big Tech acquisition, the report said, citing individuals close to the matter.

Meta Platforms and the regulator did not respond to requests for comment from Reuters sent outside working hours.

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The regulator had in October fined the U.S. social media giant Facebook, now Meta, 50.5 million pound ($67.35 million) for breaching an order that was imposed during an investigation into its purchase of the GIF platform, Giphy.

Facebook bought Giphy, a website for making and sharing animated images, or GIFs, in May last year to integrate it with its photo-sharing app, Instagram. The deal was then pegged at $400 million by Axios.

($1 = 0.7499 pounds)

(Reporting by Sneha Bhowmik in Bengaluru; Editing by Uttaresh.V)

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Evergrande shares fall after chairman cuts stake; Fantasia suspends trading

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November 29, 2021

HONG KONG (Reuters) – Shares in China Evergrande Group fell as much as 4.8% on Monday morning, after its chairman trimmed his stake in the cash-strapped property developer to raise about $344 million.

The group’s electric vehicle unit, China Evergrande New Energy Vehicle Group Ltd, also dropped more than 5% after it said the company was still exploring ways to pump capital into the unit with different investors.

Evergrande has been scrambling to raise capital as it grapples with more than $300 billion in liabilities and Chinese authorities have told its chairman, Hui Ka Yan, to use some of his personal wealth to help pay bondholders, sources have said.

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Evergrande failed to pay coupons totalling $82.5 million due on Nov. 6 and investors are on tenterhooks to see if it can meet its obligations before a 30-day grace period ends on Dec 6.

The developer disclosed late on Friday that Hui had sold 1.2 billion shares in the company at an average price of HK$2.23 each, lowering his stake in the Shenzhen-based real estate developer to 67.9% from 77%.

Once China’s top-selling developer, Evergrand’e troubles have hit the broader Chinese property sector with a string of debt defaults and credit rating downgrades of its peers in the last couple of months.

Fantasia Holdings suspended trading in company shares on Monday pending release of information. On Thursday, the developer said a winding-up petition was filed against a unit related to an outstanding loan.

(Reporting by Sumeet Chatterjee; Editing by Stephen Coates)

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