This macro fund “tactically” long the Israeli shekel on expected judicial reforms 2023
One fund manager is prepared to cut out a piece of the action whenever the government of a country that was once stable conducts a judicial makeover and the currency of a country that was once steady is predicted to surge.
This year, the Israeli shekel’s value versus the United States dollar has been more volatile than usual due to the contentious judicial changes proposed by Israeli Prime Minister Benjamin Netanyahu.
Since the beginning of the year, the value of the currency has decreased by more than three percent against the United States dollar, and it has not been this low against the greenback since March 2020. It skyrocketed after the announcement of proposed judicial reforms in early January, only a few weeks after Netanyahu assumed office, and then it plummeted by more than 6% in February due to protests against the reforms.
As President Isaac Herzog stated that the cabinet was “closer than ever” to agreeing to the reforms, the shekel experienced a small increase in value the following week.
In response to statements made by Herzog the previous week, a fund located in London called Trium Larissa Global Macro Fund went long on the shekel. However, the fund quickly canceled its position after arguing that reaching an agreement on judicial changes will “certainly take more time.”
In an interview with MarketWatch, the portfolio manager of the fund, Peter Kisler, stated that they had “priced in” most of the negative news during the previous week when they “tactically” took a long position on the shekel.
“We strategically bought shekels last week because it looked that most of the bad news was already priced in, and the Bank of Israel may start to support the currency if it dropped much more,” he added. “We bought shekels because it seemed that most of the bad news was already priced in.”
Kisler noted that once the shekel returned as a result of President Herzog’s words, he “closed [their] long on that rally” since it is likely to take more time for any deal to be reached.
“While we are somewhat positive on the currency in the longer term, we expect political noise to continue, and we are waiting for a better entry point to re-establish a position,” he continued. “While we are somewhat positive on the currency in the longer term, we expect political noise to continue.”
It is still unclear when a better entry point will present itself, and the shekel has lost “even more ground” since the week’s volatility in U.S. bank stocks that was sparked by the closure of Silicon Valley Bank, according to Eimear Daly, an emerging markets strategist at NatWest. This week’s volatility in U.S. bank stocks was sparked by the announcement that Silicon Valley Bank would be closing.
According to a note that Daly sent to clients on Monday, a worsening forecast for the global and American technology industry will have a direct negative impact on the shekel.
“The high-tech industry is responsible for 15.3% of Israel’s total GDP. 2.16 percent of Israel’s gross domestic product is accounted for by new businesses, a factor in economic growth that is strongly reliant on obtaining finance “— I quote her. More specifically, the fact that there are considerable Israeli investments in the US NASDAQ index as well as a high FX hedging ratio indicates that ILS has a favorable correlation with the NASDAQ.
The latest on the changes to the legal system is detailed here.
The Supreme Court’s ability to review and overturn laws will be restricted as part of these reforms, as will the government’s influence over the appointment of judges to the highest court, and a law will be enacted to give the right-wing coalition government the authority to ignore decisions made by the Supreme Court.
Protests on the streets of Tel Aviv and among investors have been ignited as a result of the proposals, with some investors believing the measures may potentially necessitate involvement from the central bank.
“The Israeli shekel, which is typically stable, appears to be suffering from the weight of domestic political instability right now. Because of this, the Bank of Israel could be forced to step in and sell foreign exchange “According to ING’s monthly FX report, which was released on March 6th,
In a note to clients dated March 7, Chris Turner, the head of FX strategy at ING, stated that “Investors will very probably want to see some tangible political consensus on these judicial changes before rebuilding long holdings in the shekel.”
Read: Israel’s renowned military is picking a side as critics of Netanyahu’s new far-right administration perceive it abandoning democratic norms.