Political uncertainty puts pressure on shekel

• Published date: 29 May 2023

The shekel is currently trading at its weakest since March 2020, at the start of the Covid pandemic. The weakness of the Israeli currency reflects the political and security uncertainties in Israel and the consequent investor concerns

Meitav Dash chief economist Alex Zabezhinsky said, "The shekel exchange rate has lost its connection to economic forces, mainly the US stock market. It is currently influenced mainly by developments in the political-security arena." In other words, the budget's approval did not lead to a rise in the various indices, but the exact opposite.

Concern about continued political uncertainty is also expressed by foreign economic analysts. Wells Fargo Securities emerging markets economist and FX strategist Brendan McKenna wrote, "With the budget now approved, Netanyahu is free to continue pursuing the judicial reform agenda, which could result in renewed demonstrations and place depreciation pressure on the shekel. If governance deteriorates amid the judicial overhaul and other political priorities, we would expect foreign investor capital to exit Israel."

The sharp weakening last week of the shekel was also supported by IDF Chief of Staff Lt. Gen. Herzi Halevi, who speaking to the Herzliya Conference sent a direct message to Iran. "There are negative developments on the horizon that could lead to action," said Halevi, mentioning that Iran is moving forward more than ever towards enriching uranium. Following Halevi's comments the shekel depreciated by 1.3% and over the four days of trading last week the Tel Aviv 35 Index lost 3.5%, although it clawed back 0.7% yesterday.

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