Israel’s
CPI reading for May came in with a rise of 0.7%. This is the highest CPI for May in 7 years. While the number came in at the high end of estimates, it wasn’t much of a surprise. We have been speaking about surging inflation for about a year. I would expect the June CPI number top be strong as well, due to a strengthening US dollar. The USD has a very strong weighting in the index, and in fact over the last year, it has skewed the CPI number down, because the USD has been so weak. Now that it has started to move higher against the Shekel, something that started in June, I would look for continued higher CPI numbers looking ahead.
I look for the Bank of Israel to potentially raise interest rates in order to try and curb the spike in inflation. With local interest rates now at 3.5% , I wouldn’t be surprised to see rates a full 1% higher by the beginning of the fall.
While this continued inflation is going to hurt local fixed rate Israeli bonds, look for Israeli hi-tech to actually benefit from this move.
Federal Reserve chairman Ben Bernanke’s tough talk on the US Dollar
helped support the greenback against the major global currencies, but
it caused a minor rally against the Israeli
shekel. As a reminder, the shekel has been one of the world’s strongest
currencies over the last year, and its strength, while serving as a
seal of approval on the state of the Israeli economy,
has crushed exporters as well as many Israeli hi-tech’s that sell
globally but keep their R&D local, due to the fact that their
expense line has increased from the currency differential.
Many local market participants were wondering just how low the dollar could go. While IOI
is not calling a bottom, we do think that chances are quite good that
we will see a continued dollar appreciation against the shekel. Keep in
mind that we have see a 3.5% move in the last 4 trading days.
This move could have profound impact on some Israeli stocks that trade in the US. Companies like Alvarion (ALVR), Nice Systems (NICE), Amdocs (DOX),
all do R&D in Israel and their expense lines have increased due to
the strength of the shekel. The recent dollar run could potentially
have positive ramifications on earnings for these companies.
Fundamentally, Israel, like many other emerging economies, is
experiencing surging inflation, never a positive for a currency. On a
technical level, we could potentially see a lot of short covering on
shekel positions, thus exaggerating the dollar’s move higher.
Disclosure: Author’s fund has no position in any stock mentioned as of 6/16/08.
