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Shekel Outperforms Emerging Markets on Growth

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Thursday, January 28th, 2010

(Bloomberg) — The shekel is likely to outperform emerging-market currencies in Europe, the Middle East and Africa as the Israeli economy expands and the central bank raises rates, according to Bank of America Corp.-Merrill Lynch.

 The CHART OF THE DAY shows the shekel has been the best performer since the start of the year versus an equal-weighted basket of the U.S.

dollar and euro. The Israeli currency is likely to be the safest bet “if the global markets continue to be unsettled going forward,” outpacing currencies such as the Turkish lira and the Polish zloty, Merrill’s Benoit Anne said.

 “The shekel is the best defensive play among emerging markets in Europe, Middle East and Africa, and perhaps even across all emerging markets,” said Anne, head of emerging market foreign-currency and debt strategy at the bank. “My bullish view reflects the tightening of monetary policy implemented by the Bank of Israel, the steady improvement in macro conditions, as well as very attractive valuation.”

The shekel gained 1.6 percent versus the greenback and 5 percent against the euro since the start of the year. The Israeli currency, which traded at 3.7315 per dollar at the close on Jan. 29, will strengthen 5.1 percent to 3.55 by year-end, according to the median estimate of eight analysts surveyed by Bloomberg. Anne sees the shekel gaining to 3.5 per dollar by June.

The economy may grow more than the central bank’s forecast of 3.5 percent this year if the global recovery accelerates, Bank of Israel Governor Stanley Fischer said in a Bloomberg TV interview Jan. 27. In August 2009, he became the first central bank governor in the world to raise interest rates on signs of a global recovery. He has since increased the rate two more times to 1.25 percent.

Israel’s foreign reserves more than doubled to $60.6 billion at the end of last year from March 2008 as the central bank bought foreign currency to stem a 14 percent rally in the shekel against the dollar since April 2008.