Shekel shows power

By Ben Mitchell, July 14, 2011

Whilst the UK's economy has stuttered and stumbled its way out of recession, Israel has enjoyed an entirely different experience.

The Israeli economy is buoyant, with a GDP forecast of 5.2 per cent for this year and unemployment at a record low. Exports are also looking robust despite the strength of the shekel.

Bearing in mind that the foreign exchange markets are trading on interest rate differentials, Israel's 3.25 per cent interest rate makes it very attractive to foreign investors, which has pushed the value of the shekel higher still.

However, for anyone who is looking to move significant amounts of money in and out of Israel, it is worth remembering that geopolitical fears - such as the potential UN declaration of a Palestinian state in September - still loom large in the background.

At the moment these factors don't seem to be making any impact on the shekel, with several high-profile commentators observing that there seems to be a complete disconnection between geopolitical risk and investment risk when it comes to the Israeli situation. Investors have consequently continued to talk up prospects, putting their money where their mouths are, by heavily investing in Israeli assets - despite a recent hike in tax burdens for overseas investments.

Investors are heavily investing in Israeli assets

With this in mind, there is no reason why the shekel should not continue to strengthen against the world's leading currencies, and an economic crisis in Israel is not likely any time soon. However that doesn't mean that other currencies (including the pound) will not rally, and that the shekel's relative value will fall away as a result.

When dealing with clients I have found that prices and costs are clearly always going to be important, but most people at the moment are looking for sound advice when considering the currency markets.

My advice would be for people to protect themselves from further shekel strength by setting their exchange rate in advance, whilst building in some flexibility just in case things move in the opposite direction.

This way anyone moving money in and out of the country can avoid disappointment should we see some positive UK data (which, let's face it, is long overdue), or in the unlikely event that regional geopolitical instability begins to have a significant negative impact on the Israeli economy in a more profound way than is currently the case.

Ben Mitchell is an international currency specialist at foreign exchange brokers, World First.

Last updated: 10:50am, July 14 2011