Shekel Leads Emerging Currencies on Bets Tensions Will Subside

(Bloomberg) - Israel's currency jumped most among emerging-market peers on Monday amid bets that the nation's gains against Hezbollah will lead to a reduction in tensions across the Middle East.

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The shekel rose as much as 0.9% to 3.6928 against the US dollar, defying a credit-rating downgrade by Moody's Ratings. The gains put the exchange rate on course for an 1.8% advance in the July-September period, which would be the best quarter this year against the globally weaker dollar.

Israel stepped up its offensive against Hezbollah in past days, killing its leader Hassan Nazrallah and bombing central Beirut. Traders are waiting to see whether cease-fire deals will be struck with Hamas and Hezbollah, or if the country's military gains will shorten the war as the first yearly observance of the Oct. 7 terror attacks against Israel near.

"The shekel is primarily a geopolitical trade at this point," said Daniel Hass, the head of shekel fixed-income strategy at Bank Hapoalim in Tel Aviv. "I agree with a lot of people who say we are coming to the end game, or at least the beginning of the end. The developments since Friday night are seen as positive steps with potential to shorten the war."

The shekel been resilient to the ongoing regional conflict as well as concerns around the need for an expansive fiscal policy to fund the war. While the recent offensive has led to a triumphant mood over the pummeling their military is giving the Iran-backed group, it has also raised concern of a wider conflict that might pit Tehran against Washington.

"Iran's retaliation is always a risk and we can't afford to be complacent," Hass said. "But some say it could be muted. The overall market sentiment, of course, is wait-and-watch."

Already Priced In

Over the weekend, Moody's downgraded Israel for the second time this year as it cited the economic costs of war. The company lowered the nation's credit rating by two notches to Baa1 from A2, and kept the outlook negative.

Israeli sovereign bonds had already priced in a reduction of the country's sovereign rating by at least two steps, and there was little for them to react on Monday to Moody's move, according to Guillaume Tresca, a global EM strategist at Generali Asset Management.

"The Moody's downgrade is not a surprise," he said. "All agencies said at that time that an extension of the conflict or a protracted conflict would be credit negative."

In the equities market, war and fiscal concerns played a lesser part than idiosyncratic corporate news. The benchmark Tel Aviv Stock Exchange 35 Index halted a six-day rally and posted a 0.5% loss.

The main contributor to the decline was oil-and-gas company Energean Plc, whose shares were cut to hold from buy at Jefferies International. Sentiment on the stock was also soured by a report that the defense forces had intercepted an unmanned aerial vehicle that crossed into the country's offshore economic zone.

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