Checkpoint Systems, Nice Systems, Tech Sector Boost Israeli Currency Despite War
NEW YORK ( TheStreet) -- The ceasefire between Hamas and Israel ended today when rockets were fired again at Israeli cities close to the Gaza strip. And peace talks in Cairo ended after the Israeli delegates didn't accept Hamas's terms to commit to open an airport and sea port in Gaza in the future.
Despite the ongoing war, the Israeli currency -- the New Israeli Shekel -- remains strong against leading currencies such as U.S. dollar and euro. What keeps the Israeli currency strong? And will it remain robust?
For one, Israel's strong tech industry continues to thrive, with companies such as Checkpoint Systems
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Nonetheless, these companies didn't perform well yesterday, as shares of Checkpoint Systems took a nose dive and fell by 3.5% to $13.56 a share. Nice Systems also shed 29 cents to settle at $39.20.
Israeli defense companies such as Elbit Systems
The other issue is the Israeli cash rate, which remains relatively high compared to other leading economies. The U.S. cash rate is at 0% to 0.25%, and the European Central Bank lowered its cash rate to 0.15% and its deposit rate to a negative 0.1%.
Bank of Israel , however, is trying to devalue the New Israeli Shekel in order to support Israeli exports. This includes cutting down the cash rate by 0.25 percentage points to 0.5% -- the lowest level since August 2009. BOI also purchased $400 million in the foreign exchange markets Thursday.
This purchase isn't a new strategy and has been employed by the BOI for the past several years. Moreover, since the beginning of the year the bank increased its foreign currency reserves by 6.5%.
The recent war is estimated to cut down the Israeli GDP by 0.5% in 2014, according to Bank of Israel's Governor Karnit Flug. Further, the rise in Israel's defense expenses is likely to force the government to raise taxes in order to maintain the government's deficit target of 2.5%. The rating agency Fitch already estimates Israel's incursion to Gaza could cause the government to miss this target this year.
Looking forward, if the Israeli economy continues to weaken because of the war and the adverse impact it has on the economy, and Bank of Israel takes additional measures to devalue the NIS with more rate cuts and purchase USD, these developments could eventually lead to a weaker shekel.