(Bloomberg) -- Israel’s shekel slumped on Monday and the nation’s bond yields jumped to the highest since Aug. 1 as an elusive cease-fire and a renewed threat of escalation kept investors on edge.
The currency fell by as much as 1.2% to 3.7139 per US dollar for the second-worst performance among 150-or-so currencies tracked by Bloomberg. The shekel’s one-month implied volatility, derived from options prices, rose to the highest since October 2023. The 10-year local-bond yield increased for a second day, and the equity benchmark in Tel Aviv dropped the most in a week.
Cease-fire talks between Israel and Hamas stalled as both sides blamed each other for the delay and a blast in Tel Aviv underscored the risk of another spiral of violence. Israeli local markets, which had been somewhat resilient to war risks this year, showed signs of weakening under pressure after the latest economic data pointed to slower-than-expected growth. Investors were monitoring US Secretary of State Antony Blinken’s visit to Israel and the threat of Iran’s attack on Israel.
“The core risk to the shekel surrounds the potential longevity of the conflict, which could create a structural break that may have reverberations for the currency’s long-run fair value,” said Ehsan Khoman, head of research for commodities, ESG and emerging markets at MUFG Bank in Dubai.
Monday’s losses in Israel’s markets came amid a risk-on day in global markets that led to stock and currency gains in the developing world. The MSCI EM Currency Index rose to a record and was on course for its biggest monthly rally since November. The stocks benchmark headed for a one-month high.
Sentiment around emerging markets has improved since an Aug. 5 slump as investors’ concerns abated about the potential for a US recession and expectations built up for the start of Federal Reserve interest-rate cuts next month. Even after a carry-trade blow up two weeks ago — as bets involving borrowed yen suffered losses — most EM currencies are handing investors positive carry returns this month.
While the broader market’s rebound has helped Israel’s assets avoid a big selloff amid this month’s escalations in Middle Eastern tensions, that resilience is showing signs of weakening. The implied volatility measure has increased 2.3 percentage points this quarter, the most since March 2023.
Some traders remain optimistic on the shekel and say that it can post a rally once a cease-fire comes into force. The risk of a significant selloff is “negligible,” Khoman said. Beyond geopolitical risks, the shekel is also seen taking its cue from central-bank policy — with policymakers staying hawkish as they see a longer war.
“The central bank’s capacity intervention remains intact, with less than half of the Bank of Israel’s $30 billion FX-selling programme sold as of June,” he said. “Second, despite the recent upward surprise to inflation, real policy rates remain positive amidst a pause in the rate-cutting cycle.”
--With assistance from Colleen Goko.
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