The shekel as a currency of refuge; Who bought the shekel on a volatile day?

(From Globes [online] - Israel's Business Arena, provided by LexisNexis)
Publication: Globes [online] - Israel's Business Arena
Avi Temkin
Amid the "crisis ritual", if one can call it that, which dominated financial markets last week, one development on Friday stood out: the rapid strengthening of the shekel. After a morning depreciation of 0.5% which left the shekel-dollar representative rate at NIS 4.29/$, the Israeli currency began to power northward, reaching NIS 4.24-4.25/$ by the time afternoon approached.
There have been previous occasions on which the shekel strengthened even more sharply, but Friday's upswing was one of the only occasions, if any, when the shekel demonstrated strength in the face of such stormy global markets, with talk of a crisis on the money market in Europe, sharp declines in share prices worldwide, and rumors of hedge funds on the verge of being wiped out. In days gone by, such scenarios would have prompted Israeli investors to buy dollars, almost on instinct. On this occasion, however, the movement was in the opposite direction, with investors selling dollars and buying shekels instead.
The identity of those buyers is of the utmost importance - were they Israelis calling in their spare cash now that times are tough, or perhaps they were Israelis and foreigners who believe that the Israeli economy will be less vulnerable than others to the current turmoil? But far more crucial is the trend that Friday's events reflect. Was this a one-time occurrence, to be followed once again by a marked depreciation, or does it herald the onset of an actual change in trend?
The first option, that this is an ephemeral phase, cannot be ruled out. All told, the current crisis has already triggered several trends far more extraordinary, such as the disappearance on Thursday of liquidity on the money market in the Eurozone within a few hours.
But what are the chances that it could be the second option and what would be the significance of this? It is worth remembering, in this context, all the analyses that have been published both in Israel and overseas about the shekel, which in themselves attest to its strength. Israel is a country with a substantial current account surplus on its balance sheet, the economy here is less exposed than others to the risks related to hedge funds, and Israel does not have the kind of credit portfolio troubles that could bring down financial entities within a day.
The coming days will give a clear indication as to which of the two above options is the right one. But we should already be considering the repercussions should it become apparent that the shekel has become a safe haven for investors looking for stable assets. Should the shekel be perceived as a comparatively safe asset - and it should be stressed that this is by no means clear yet - the repercussions will be felt not just in the foreign currency market, but also in other assets, especially the short-term loan and government bond markets. All this is, of course, provided that the trend we saw on Friday does not make yet another u-turn. At a time of extreme volatility, one cannot rule that prospect out either.
Published by Globes [online], Israel business news - www.globes.co.il - on August 12, 2007
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