Leading US financial institution JPMorgan Chase & Co. has warned that the recent weakening of the Israeli shekel may be a sign of long-term trends for the currency, which hit a three-year low this week amid heightened uncertainty over the government’s contentious judicial overhaul.
Citing the ongoing political turbulence in Israel relating to the coalition’s efforts to weaken the judiciary, the bank said in a note to clients that while the shekel’s movement has largely tracked that of US stocks during the past decade, that relationship may now longer hold as Israeli investors allocate more funds into overseas assets.
“Persistent domestic political risks have inspired a structural shift in foreign allocation for local institutional investors,” wrote JPMorgan strategist Anezka Christovova, according to Bloomberg. “This shift may have some further to run and it means that the gap between the shekel and US equities could be permanent in nature.”
The bank said “political risk is likely to remain elevated,” ahead of a High Court of Justice hearing Tuesday on the first piece of legislation passed in the judicial shakeup, amid raised fears of a confrontation between the coalition and the judiciary.
But it also said the country has the “strongest disinflation story in the region” and predicted the Bank of Israel is currently done with raising interest rates, after repeatedly hiking them over the past year to battle inflation. For the second time in a row, the central bank held rates steady at 4.75% when it convened this week but said there’s a “real possibility” they could go up if inflation does not continue to moderate and the shekel further dips in value.
“We keep a bearish bias on the shekel,” Christovova added in the note. “Poor entry levels and high day-to-day political volatility keep us on the sidelines.”
Germany’s Deutsche Bank also said it has a negative recommendation on buying Israel’s currency, issuing a report called “the shekel — cheap but not encouraging,” Channel 12 news reported Friday.
The warnings by JPMorgan and Deutsche Bank came as Prime Minister Benjamin Netanyahu tries to ease international financial jitters over the judicial overhaul, which has seen the shekel drop more than 9% against the US dollar since the start of the year. Netanyahu met Wednesday with officials from Moody’s ahead of an update to Israel’s sovereign country rating the agency is expected to issue next month.
The overhaul plan has faced months of weekly mass protests alongside warnings about the economic damage. The main concern among the business and tech community is that the proposed judicial overhaul will erode democracy and weaken checks and balances, which in turn will make venture capitalists and other money-makers leery of investing their money in the country, triggering an outflow of funds. Foreign investment in Israel has already dived by 60% in the first quarter of this year, according to a report published by the Finance Ministry on Wednesday.
The shekel is also losing ground ahead of a September 12 High Court hearing on petitions against the reasonableness law — part of the government’s controversial judicial overhaul — which bars courts from intervening in government and ministerial decisions based on their “reasonableness.” Should the court accept the petition and strike down the legislation — an amendment to a quasi-constitutional Basic Law — and should the government then reject the ruling, it would create an unprecedented constitutional crisis.
Later, on September 28, a separate hearing will be held on petitions against a law shielding prime ministers from forced recusal.