‘And The Award For The Most Creative Excuse For Joining Currency Wars Goes To … The Bank Of Israel!’

“And the award for the most creative excuse for joining currency wars goes to…” (Lighthouse Investment Management, May 13, 2013):

… the Bank of Israel!

  • On Monday, Bank of Israel cut interest rates in a surprise decision to 1.5% from 1.75%.
  • Also, they are done with watching the Shekel strengthen against the dollar:

“Beginning this year, and in coming years, the Bank of Israel will purchase foreign exchange in order to offset the effect of natural gas production on the exchange rate.”

  • Hilarious! The BoI tries to ‘justify’ entering the global currency wars with natural gas production. A top contender in Central Banking Oscar’s for “Most creative excuse for FX manipulation”!
  • The Q&A brought up a critical question (not the kind of soft balls lobbed at ECB and the Fed by corrupt and incompetent journo’s):


“According to your policy, you only purchase foreign exchange when the exchange rate deviates from fundamental economic conditions or when there are disorderly markets. The production of natural gas is a real economic factor which is fundamental and long-term. Why offset its effect through foreign exchange purchases?”


“Natural resources are a blessing for Israel’s economy. However, international experience shows that sometimes the discovery of natural resources can have negative effects on the economy, often referred to as ‘Dutch diseases’. The goal of the policy announced is to offset these detrimental effects.”

  • The rate cut and announcement of FX interventions apparently could not wait for another 2 weeks, until the next scheduled meeting, fueling speculation something more sinister was going on. From the Q&A:


“The last time the Bank of Israel made an inter-meeting rate decision was after the collapse of Lehman Brothers, at the height of the global crisis. In two weeks you were scheduled to decide on interest rates in any case. What do you know that did not allow you to wait?”


“Recently, crucial information became available which was the basis of the decision. Central banks reduced interest rates and continue large scale quantitative easing. These intensified the appreciation pressures on the shekel.”

  • Infamously, the BoI last year bought a position in Apple stock (around $550) and suffered deep book losses. Apparently they haven’t learned anything and will continue to play in “longer-term assets with higher expected returns”:

”The foreign exchange reserves are invested in liquid assets so that they can be utilized in times of crisis. The foreign exchange flows which will accumulate as a result of this policy will be invested in longer term assets, with higher expected returns.”

  • What kind of assets are those? With fixed income, your return is known at time of purchase. Talking about “expected returns” means anything but fixed income, or things like equities, commodities, private equity or hedge funds. Good luck!
  • You got to love the fact central bankers are beginning to believe in the bubble they helped to create!
  • What’s next – the Swedish Riksbank entering currency wars due to the discovery of a large number of blonde au-pairs?

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