Goldman Sachs warns legal reforms could harm shekel

In its latest report on global forex trading published on Friday, US investment bank Goldman Sachs economics research department warned that the government’s planned judicial reforms could harm the shekel.

In a section entitled “an unusual deviation from global tech,” Goldman Sachs economists said, “Throughout the pandemic period the Israeli shekel has stood out as a currency that is particularly driven by global, rather than domestic, factors. In particular, even as domestic political developments themselves remained volatile in recent years, going long USD/NIS has consistently ranked as our top-ranked FX hedge against a global equity drawdown and, for many years now “global tech stocks down, USD/NIS up” has been a steady rule of thumb, indicating that it is global equity developments, rather than domestic political ones, that are key to a forward-looking view on the shekel. Over the past six months, these trends have broadly continued: over this period, shifts in the Nasdaq index, for example, explain nearly 60% of the high-frequency variation in USD/NIS: by far the highest share of any major currency.”

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However, Goldman Sachs economists warn, “Judicial reforms proposed by Prime Minister Benjamin Netanyahu’s government have sparked concern among some investors, including locals, that the reforms could reduce judicial independence in Israel, and that – for example, by eventually reducing FDI (foreign direct investment) or tech sector growth in Israel – the shekel may become more subject to domestic policy risks than it has been in recent years. In line with these concerns, USD/NIS has seen a notable deviation this week from its typical correlation with global tech indices.”

However, Goldman Sachs adds, “A definitive judgement on this seems premature, however. It remains to be seen if the proposals will be implemented in full and it is also possible that, as it has done recently, the Bank of Israel could accompany significant shekel depreciation with hawkish communication on monetary policy, which could potentially ameliorate FX depreciation.”

Goldman Sachs continues, ‘But perhaps most importantly, there are few signs that recent developments would affect the institutional hedging behavior of local investors, which likely underpins the striking correlation between USD/NIS and global tech stocks that have driven the shekel for years. Overall, while the recent increase in political uncertainty is concerning and could continue to be reflected in some further shekel weakness over the short-term, the fundamental links that have been established between USD/NIS and global tech stocks will take time to erode.”

Published by Globes, Israel business news – en.globes.co.il – on January 29, 2023.

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