This macro fund ‘tactically’ went long the Israeli shekel on the planned judicial reforms

The currency is down over 3% against the greenback in the year-to-date and is at its lowest against the U.S. dollar since March 2020. It shot up on the announcement of planned judicial reforms in early January weeks after Netanyahu took office, and sank over 6% in February over the protests against the reforms.

Last week, the shekel rose modestly upon after President Isaac Herzog said the government was “closer than ever” agreeing to the reforms.

London-based Trium Larissa Global Macro Fund went long on the shekel in reaction to Herzog’s comments last week and then soon closed its position as they argued that an agreement on the judicial reforms are “likely to take more time.”

Peter Kisler, portfolio manager of the fund told MarketWatch, that they had “priced in” most of the bad news last week when it “tactically” took a long position on the shekel.

“We tactically bought the shekel last week as it seemed that most of the bad news was priced in, and the Bank of Israel could start to support the currency if it weakened much further,” he said.

Kisler added that after the shekel rebounded following President Herzog’s comments, he “closed [their] long on that rally, as any agreement is likely to take more time.”

“While we are somewhat positive on the currency in the longer term, we expect political noise to continue, and are waiting for a better entry point to re-establish a position,” he continued.

When that better entry point will come is still unclear, and the shekel has lost “even more ground” since this week’s volatility in U.S. bank stocks sparked by the Silicon Valley Bank closure, according to Eimear Daly, emerging markets strategist at NatWest.

A deteriorating outlook for the global and U.S. technology sector will directly hurt the shekel, Daly said in a note to clients on Monday.

“The hi-tech sector accounts for 15.3% of Israeli’s GDP. Start-ups, a driver of economic growth which is highly dependent on financing, account for 2.16% of Israeli GDP,” she said. “More explicitly, significant Israeli investments in the US NASDAQ index and a high FX hedging ratios means ILS is positively correlated with the NASDAQ.”

Here’s the lowdown on the judicial reforms

The reforms entail limiting the Supreme Court’s powers to review and strike down laws, giving the government more sway on selecting judges for the highest court and a law allowing the right-wing coalition government to override Supreme Court rulings.

The plans have sparked protests on the streets of Tel Aviv, and by investors, with some saying the reforms with could provoke central bank intervention.

“The normally solid Israeli shekel now seems to be weighed by domestic political uncertainty. This may force the Bank of Israel to intervene and sell FX,” ING said in its monthly FX note, published on Mar. 6.

“Investors will very probably want to see some concrete political agreement on these judicial reforms before rebuilding long positions in the shekel,” added Chris Turner, ING head of FX strategy in a Mar. 7 note to clients.

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