Israel, the tiny Mediterranean nation widely recognized on the global stage for its political situation, has built one of the most impressive Middle Eastern economies that is not dependent on oil and gas exports. The burgeoning technology sector has transformed the nation into a global hi-tech hub that is renowned for its work in multiple spheres including pharmaceuticals, biotechnology, alternative energy, software and hardware development and also cyber security. The recent discovery of offshore energy deposits has further improved the outlook for long-term economic prospects of the nation and when coupled with the strong emphasis on innovation, the shekel is poised for gains in the future. However, in the near-to-medium term, the currency is likely to continue losing ground versus the US dollar.

The Fundamental Picture

Although largely overshadowed by the political struggle, on the whole, the Israeli economy is among the best performers in the region, creating a desirable set of adaptive solutions that have attracted some of the largest technology multinationals on the globe. Companies such as chipmaker Intel (INTC) have long had a presence in Israel, for both research and development and production. Other technology giants such as Google (GOOG), Apple (AAPL), Microsoft (MSFT), Facebook (FB), Hewlett Packard (HP) and many more have built a presence in the country to take advantage of the flourishing startup sphere with many of these multinationals focusing on local acquisitions.

Aside from the success in the information technology space, the country boasts a strong influence in the alternative energy space, namely solar and also in sustainable agriculture. With limited natural resources, the country has been faced continually with overcoming problems such as limited access to water and energy, two of the reasons innovation has become such a relevant factor. Many novel Israeli solutions were built to tackle homegrown problems that sprung up as the country evolved over time. The strong focus on building forward looking technologies to ameliorate these problems is what has propelled the nation to become a global hub for many of these new developments.

From the fundamental side, the economy is still managing to grow despite the multitude of global headwinds, not least of which was difficulty stemming gains in the Shekel. The Bank of Israel has reduced interest rates to a record low 0.10% in order to combat a strengthening Shekel that has largely hurt export competitiveness. As an export economy, mainly exporting its technology prowess, Israel needs a weaker local currency to remain viable on the global stage. However, it might be a problematic plan down the road as the discovery of major offshore gas deposits threatens to undo the Central Bank’s work. The offshore gas deposits are so large that it creates the potential for Israel to be viewed as a commodity currency akin to Australia or Canada.

On the whole, the economy is in good shape, especially in relation to the rest of the fragile global economy which has been experiencing a steady decline in momentum. Israeli unemployment currently stands at 5.20% and while the government is currently running a deficit, the nation is fairly well disciplined when it comes to certain fiscal matters. Nevertheless, while the economy is currently growing at an approximate 2.68% annualized pace, strength in the Shekel might hurt the outlook. Another looming concern is the recent bout of deflation that hit. At this point, the Central Bank also has limited tools to fight any further appreciation in the Shekel due to policy nearly at the zero-bound. However, once the United States begins to raise interest rates, the Bank of Israel will have more wiggle room to respond to the current issues.

The Technical Take

Israel has a strong outlook owing to its strong focus on the technology export economy and in the meantime, is set to weaken further as anticipation of the Federal Reserve raising interest rates boosts the USD/ILS exchange rate. While this has the benefit of keeping the economy competitive for exports, it will not last indefinitely, especially as the nation transitions to a commodity currency which will likely force the Shekel higher in a setback for policymakers. The USD/ILS pair has risen dramatically over the last year after the Federal Reserve announced no new easing measures and the desire to raise rates. Since peaking at over 4.0600 in March, the USD/ILS pair has been on a technical retreat, pulling back approximately 50% from highs before the most recent upside reversal.

The prevailing longer-term uptrend set to resume, it is worth waiting on pullbacks to take advantage of recent momentum. From a technical perspective, the USDILS pair is currently trading at multi-month highs with further appreciation expected in the short-term as the offshore energy situation is unlikely to impact near-term fundamentals. The pair is currently trading above the 50-day moving average but below the 200-day moving average meaning that the outlook from this indicator is mixed. However, on a shorter term basis, namely the 4-hour chart, the pair is trending higher in an equidistant channel formation. The key for taking advantage of this chart pattern is the initiation of Call Positions at the lower channel line with expectations that USDILS will rise towards the upper channel line. Taking Put Positions from the upper channel line is not suggested due to the narrower potential for reward and higher risk.

Conclusion

From a fundamental perspective, Israel is poised to be one of the largest regional economies in the Middle East as its hi-tech emphasis and recent energy discoveries mold the nation in a global economic hub. While the Bank of Israel is keen on keeping the shekel weak to spur inflation and stimulate the export economy, in the long-term the Shekel is likely to appreciate further in response to the economy transitioning to commodity currency status. However, in the near-term, taking advantage of the Federal Reserve’s interest in raising rates will see Call Positions rewarded on the dips when USDILS pulls back from momentum higher.