Shekel Slips Further But Downside Pressure Moderates

The shekel remains fragile after a sharp two-day sell-off inspired by the adoption of a key element of the government's judicial overhaul, despite finding some reassurance in the lack of credit-rating action after Moody's said it would release a special unscheduled report on Israel yesterday.

• USD/ILS has edged higher this morning but is yet to test yesterday's high (3.7232), last changing hands +110 pips at 3.7078. A break above Jun 30 high of 3.7308 would bring Jun 2 cycle high of 3.7551 into view. Implied volatilities remain elevated, holding gains from the past two days, with one-month tenor seen at its best levels since mid-April. Meanwhile, Israel's benchmark TA-35 Index sits 2.4% on the day, reducing yesterday's loss.
• The rating agency warned of "negative consequences for Israel's economy and security situation" and a "significant risk" of political and social tensions after the Knesset passed the so-called "reasonableness" bill, significantly limiting judicial review of government decisions. Moody's changed Israel's credit-rating outlook to "stable" from "positive" in April, but did not announce any fresh decisions yesterday.
• Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich called the initial market reaction to their legislation a "momentary reaction," adding that "when the dust settles, it will become clear that the Israeli economy is very strong."