FX Market Update: Shekel Slumps as Middle East Tensions Rise

Israeli shekel sell-off continues

The Israeli shekel continued its strong sell-off as concerns about the country’s economy accelerated. The USD/ILS exchange rate rose for five consecutive days, reaching a high of 3.83, its highest point since August 7. It has risen by over 7.5% from its lowest point this year.

The main concern is that Israel is about to start a wide regional war that could hurt its already embattled economy. It has already received several credit rate downgrades from Moody’s, Fitch, and S&P Global.

The Bank of Israel has estimated that the cost of the ongoing war could jump to over $66 billion through 2025. This is a significant amount, considering that Israel has a GDP of over $525 billion.

A key concern is that many foreign investors have embraced a wait-and-see approach before allocating cash to the country.

The Israeli central bank will likely deliver its first interest rate cut since January this week. Economists see a 0.25% cut to 4.75%.

US dollar index surges

The greenback has bounced back, with the US dollar index rising for six consecutive days. It has risen to $102.50, a 2.40% increase from its lowest point this year.

The index has risen as the currency rose against the euro, pound, Swiss franc, and the Canadian dollar.

This rebound is mostly because of the flight to safety since the US dollar is often seen as a safe haven.

The rally also happened after the US published strong jobs numbers on Friday. According to the Bureau of Labor Statistics (BLS), the economy added over 250k jobs in September, a figure that was higher than expected.

The data also showed that the unemployment rate softened slightly to 4.1% while wage growth accelerated.

Therefore, these numbers mean that the Federal Reserve will be more moderate when cutting rates.

Looking ahead, the US dollar index will next react to the upcoming US inflation data and Federal Reserve minutes scheduled on Thursday and Wednesday, respectively.

Kiwi slips ahead of RBNZ decision

The New Zealand dollar, popularly known as the kiwi, slumped hard as traders shifted their focus on the upcoming RBNZ decision.

The NZD/USD pair crashed to a low of 0.6150, its lowest point since September 16, and 3.50% below its highest level this year.

Analysts expect the RBNZ to do what most other central banks have done recently. It will cut rates by 0.25% to 4.75% since the country’s inflation has softened recently. The most recent inflation data showed that the headline CPI retreated from 4.0% in the first quarter to 3.3% in Q2.

Analysts expect that the figure will continue falling in the near term. Economists at ING said:

We believe the Reserve Bank of New Zealand will follow the Fed on 9 October with a half-point cut, as a sluggish activity picture and lower inflation are adding pressure to bring real rates down at a faster pace. After that, 25bp reductions appear more likely.

ING

Canadian dollar retreats as crude oil rebounds

The Canadian dollar, popularly known as the loonie, has pulled back in the past few days mostly because of the stronger US dollar.

The currency has also reacted to the more dovish Bank of Canada (BoC) and the rebounding crude oil prices.

Like other central banks, the BoC has been highly dovish, delivering several interest rate cuts this year.

Brent, the global benchmark, rose from $68.7 to over $78, while the West Texas Intermediate (WTI) jumped from $65.35 to $74.

Crude oil prices often impact the Canadian dollar because it is the fourth-biggest producer after the United States, Saudi Arabia, and Russia.

Indian rupee nears all-time low

The Indian rupee continued its downward trend, with the USD/INR pair trading at 84, a few points below its all-time high of 84.14. It has fallen by over 1% this year, even as the Indian economy continues doing well.

India has emerged as the fastest-growing country in the emerging market, with an annual growth rate of over 7%. It has achieved this by attracting substantial foreign capital from the US and China.

India has also largely stayed neutral on the ongoing geopolitical issues in Europe and the Middle East.

The key catalyst for the USD/INR exchange rate will be the upcoming interest rate decision by the Reserve Bank of India (RBI), which is set for Tuesday. While India’s inflation has dropped slightly, the bank will likely leave interest rates unchanged.

The RBI is concerned about the country's elevated food inflation. As such, it will likely hold interest rates steady and hint of future rate cuts. It believes that cutting rates right now will affect the country’s inflation.

Bank of Korea interest rate decision

The USD/KRW exchange rate has rebounded from 1,300 earlier this month to 1,344 because of the US dollar strength.

The pair will be in the spotlight this week as the Bank of Korea delivers its rate decision on Friday. Most analysts expect the central bank to cut rates by 0.25% as signs show that the economy was slowing. However, the decision to cut rates will not be unanimous, as some officials believe in holding rates higher for longer even as inflation continues to fall.