Israeli Shekel's Hedging Costs Surge Amid Ongoing Conflict

The cost of hedging against losses in the Israeli shekel has seen a significant rise. Traders are closely monitoring the situation, with concerns over the potential next phase of the war. This surge in hedging costs comes despite the central bank's determination to defend the currency.

Compared to about one point three weeks ago, the additional cost to protect against declines in the coming month has reached 1.7 percentage points as of Friday. This marks one of the highest levels since July, a time when investors were apprehensive about moves to weaken the country's judiciary system. This rapid market reaction is evident in the risk reversal metric, which is on track for its most substantial monthly jump in almost three years.

Investors are hedging against potential exposure to Middle Eastern assets, prompted by concerns that the conflict between Israel and Hamas could escalate into a broader regional turmoil. According to Kaspar Hense from RBC BlueBay Asset Management, this could lead to higher risk premiums and weaker demand for the shekel.

Since the attacks staged by Hamas on October 7, the shekel has experienced a notable drop, falling over 5%. On Friday, the currency saw a slight rise to 4.0653 against the dollar. Additionally, investors are anticipating greater shekel volatility, evident in the widening gap between implied and historical currency movement. Expected shekel swings for the next month rose to 12%, up from 10% three weeks ago.

Besides the financial concerns, Israel has conducted limited raids into Gaza for consecutive nights, indicating potential future ground offensives. Meanwhile, the US targeted sites in eastern Syria believed to be used by Iran and its allied groups.

Moreover, Israel's bonds have experienced declines, with the 2030 note trading at a record low of 82 cents on the dollar. The cost to protect against a potential default also rose to 144 basis points this week.

In summary, the surge in hedging costs for the Israeli shekel reflects the heightened uncertainty due to the ongoing conflict. Investors are closely watching the situation, with concerns over potential escalations. The shekel's value has seen a significant drop since the attacks earlier this month. This situation highlights the broader economic impact of the conflict and the challenges faced by the Israeli economy.

Also Read: Middle East Conflict Sends Shockwaves Through Global Markets