Gas barons will profit while traditional exporters may suffer.
By Eytan Avriel

This has gone widely unnoticed, but underneath the surface, a drama has been unfolding in the forex market.

After almost three months during which the dollar stayed above NIS 3.80, if not far above that level, in recent weeks speculators have begun buying shekels again. The result is that the dollar exchange rate has been crawling downward.

On Thursday the dollar weakened by 0.6% against the shekel. It’s weakened by 2% for September so far. Trading starts today at NIS 3.73 per U.S. dollar.

The Bank of Israel has not stood by twiddling its thumbs. Last week it intervened in the market several times. It did not buy much, a few tens of millions at a time. But it sent a message that it wouldn’t like the shekel to appreciate any more. Traders who spoke with Bank of Israel officials described the central bankers as “tense.”

Why buy shekels now?

Why has the dollar been weakening in the local market? Dealers report foreign banks, most notably Citi, have been making heavy dollar sales. Nobody knows whether Citi was buying shekels for itself or for clients, for instance whether it was serving as a broker for hedge funds.

Why would the Citi traders buy shekels now, anyway? This is why, and it may surprise. Last Thursday, the Citi research desk sent its clients an analysis about how the gas discoveries in the Mediterranean would likely impact Israel’s economy.

It concluded that the gas from Tamar and Leviathan would not substantially impact economic activity, but it would substantially impact Israel’s current account (the ratio between imports and exports ) and would cause the shekel to appreciate. Moreover, Citi claims, the recent purchases of shekels were by bodies that reached much the same conclusion.
Will Israel be afflicted with the Dutch disease?

The analysis by David Lubin, a London-based Citi economist, goes roughly like this. Israel currently imports all its energy needs. It spends $10 billion a year on fuel. Once gas starts to flow, Israel will save about $4 billion a year, which means its current account will go up by that $4 billion, which is equivalent to 2% of Israel’s gross domestic product.

Citi concludes that the surplus in foreign currency may infect Israel with “Dutch disease.” That happens when a country has a windfall of foreign currency, usually following a major national resource discovery.

If the shekel does shoot up against other currencies, it will hurt industrial and technological exports. The gas barons and their shareholders will profit, but traditional exporters will weep.

Naturally, Lubin is cautious. He admits that his calculations are rough and that the uncertainty regarding the gas discoveries and their development remains intense.

But there’s one thing on which he’s willing to bet. The more information is disclosed about the gas finds, mainly Leviathan, the more the shekel will react.

That is not an obvious correlation. Forex traders, including at the banks and hedge funds that specialize in currencies, don’t tend to enter positions that last years. They get in, splash about and get out.

Gas from Tamar isn’t expected before 2014. Yet possibly a number of players were persuaded by the Citi argument, and they aren’t sitting around waiting, they’re exchanging dollars for shekels.