Last week, Goldman Sachs was subjected to sniggers in Israel's business press. The American investment bank had put out a 60+ page study on the weak dollar's effect on sectors and stocks around the world. The bank's economists also built a model evaluating the "real" value of the dollar against other currencies.
A chart appended to the study indicated that the dollar would weaken 10% to 15% against the euro. It also showed that the shekel is 25% undervalued compared with the sagging greenback.
Assuming that Goldman Sachs believes that gap will close one day, that indicates it estimates the shekel will surge to NIS 3.6 to the dollar. Today the shekel trades at about NIS 4.65.
A rate of NIS 3.6 to the dollar is laughable. The local reactions to Goldman Sachs' report ranged from incredulity to "typo", but in any case were an opportunity to snipe at the most prestigious investment bank on Wall Street.
But the report was not a macro-economic study. It was an attempt to predict how stocks will perform in the changing currency climate, prepared by a team led by renowned analyst Abby Joseph Cohen. It provided a golden opportunity for cynics to dredge up how inaccurate Cohen's bullish recommendations had been proved by the Wall Street crash.
Predicting that the shekel will rise back to NIS 3.6 to the dollar is peculiar, especially as the writers explain that a currency's value should drop when inflation rises, and growth and productivity fall. All three criteria have substantially worsened in the last three months. The forecast becomes even more bizarre when factoring in Israel's exchange rate policy, which includes a fluctuation regime that the Bank of Israel must enforce and its floor is NIS 3.9.
The thing is, Cohen and Goldman Sachs were not writing that the shekel will surge to NIS 3.6, nor is that the bank's position.
They were discussing a theoretical model, and saying that situations of economic imbalance can persist over long periods of time. Their paper was not about Israel at all, and did not purport to analyze the local economy.
The person who does prepare assessments for Goldman Sachs on Israel's economy is their macro-man, Daniel Tenengauzer, and he hurried to clarify that NIS 3.6 is not the bank's forecast for the shekel-dollar rate. No, the bank's position on the shekel has not changed, he said. He estimates that the shekel-dollar rate will gradually drop in 12 months' time to NIS 4.45.
NIS 4.45? A far cry from NIS 3.6, this is true, but that is very optimistic too. Israel's experts and dealers generally disagree. But Tenengauzer's prediction is in line with Goldman Sachs' position, that's for sure. For over a year the bank has been predicting an exchange rate of NIS 4.5 to the dollar, while everyone else was looking at NIS 5. In the last six months, as the dollar climbed daily to new heights, Goldman Sachs seemed completely out of whack.
Yet today it's Tenengauzer's turn to chortle, and if Goldman Sachs' proprietary investments department listens to its own analysts, it may be laughing all the way to the bank. Goldman Sachs is one of a few foreign banks that are active in the Israeli currency markets, some of the others being Citibank and Deutsche Bank. Dealers report that most of the foreign banks have been selling dollars on the local exchange, usually to take profit on dollars purchased in the past.
Well, the shekel continued to surge today, Monday, completing an amazing 7% rise since the 2% rate hike last month.
So Tenengauzer may have his laugh today. The question remains who will laugh last. First of all, any giggling should be moderated: Anybody who listened to Goldman Sachs and avoided buying dollars earlier this year, when it was trading at NIS 4.7, missed a tremendous opportunity for profit. Secondly, nobody promises that the dollar won't recover.
Many experts believe that the recession, the difficult macro-economic times, the unemployment, the inflation and the outflow of capital from Israel will all weigh down on the shekel, whipping even the vast interest rate gap between the Israeli currency and the dollar, and restoring the greenback's charms.