Israeli Shekel Nears Two-Year Low as Economy Contracts in Q3

Israeli shekel has fallen to a new 23-month low on Tuesday and is on the way to complete its 16th straight week of losses, dragged by declining GDP and deflationary pressures.

USD/ILS rallied to a high of 3.8440, its highest since early December 2012, from Monday's close of 3.8293. The pair has never ended a week lower since August. The shekel has fallen 11.5% against the dollar so far since then.

Data over the weekend showed that Israel's economy contracted 0.4% from a year earlier in the July-September quarter compared to the 1.9% growth in Q2 and analysts' expectations of 0.4% expansion.

On 8 July 2014, Israel launched Operation Protective Edge. Thereafter, seven weeks of Israeli bombardment, Palestinian rocket attacks, and ground fighting killed more than 2,200 people, the vast majority of them Gazans.

Inflation data on 14 November was slightly better than expected with the year-on-year price rise rate coming in at -0.3%, unchanged from September and compared to the market consensus of -0.4%.

The month-on-month rate too was a slight positive surprise; it came at 0.3%, bouncing back from the September reading of -0.3% and higher than market forecast of 0.2%.

Israel had been seeing easing inflation since December last year but it fell into deflation only in September. The year-on-year rate fell to -0.3% in September when analysts were expecting only a slight dip below the zero mark to -0.1%.

Rate Cut Chances

With downside risks on prices and growth materialising in alarming levels, Israel's central bank is likely to adjust monetary policy in the coming meetings.

The Bank Israel meets on 24 November with the main policy rate at its record low of 0.25% since August, the room for further cuts is limited. But still, additional stimulus measures are likely from the policymakers.

Israel entered a cutting cycle in late 2011 when the benchmark interest rate was 3.25%. So far in 2014, the rate has been slashed by 75 basis points.

USD/ILS Technical Analysis

The pair is headed for its fifth straight monthly rally and has just hit the 61.8% Fibonacci retracement of the 2-year selloff to July this year.

A successful break of the current barrier will take the pair to 3.9316 and 3.9834 before a retest of the 2012 peak of 4.0980.

On the lower side, the 50% Fibonacci ratio at 3.75 doesn't seem to be a good support line compared to the 38.2 level of 3.66%. As long as that is held, the pair has more chances on the higher side.