Daniel sent us this one, and it's a big question wrapped in a very practical concern. He's looking at the dollar-shekel rate sitting at two point nine, which is a twenty-five-year low, and he's asking something that anyone moving serious money across borders asks themselves: how do you actually think about where this is going? Not as a day trader trying to scalp a few agorot, but as someone who needs to make a real decision, a property purchase, a business transfer, and doesn't want to get blindsided. And his question gets at something specific. He wants to know what the people who do this professionally, the analysts at institutions, the people writing the forecasts, what levers are they actually pulling? What's the blend of geopolitics and technical chart analysis that goes into saying, here's where we think support levels are, here's where we think the floor might be?
He's right that this isn't one question, it's two, and they're connected in ways that most coverage glosses over. The first is, what's actually driving the rate? Like, when someone says the shekel is strengthening, is that even accurate, or is it a dollar weakening story? And the second is, once you've got the fundamentals in view, how do you read the chart for those pivot points where the trend might actually reverse or at least pause? Those are different skill sets, and most people only ever hear about one or the other.
The geopolitical weight on this pair is unusual. Most major currency pairs, you're looking at interest rate differentials, trade balances, maybe some political risk premium around elections. The shekel has all of that plus a security dimension that can swamp everything else in a week.
Let's start with the fundamental question, because it's actually more interesting than the headlines make it sound. Is the shekel strong, or is the dollar weak? The answer, and this is where it gets genuinely tricky, is both, but not in equal measure and not at the same time. If you look at the shekel against a basket of currencies, the Bank of Israel publishes this, the nominal effective exchange rate, the shekel has been appreciating against that basket for years. That's a shekel strength story. But if you zoom in on the dollar specifically, the dollar has been weakening against almost everything over the past eighteen months. The DXY, the dollar index, is down something like twelve percent from its twenty twenty-two peak.
The shekel is running up a down escalator.
That's exactly the image. The shekel is strong, but against the dollar, it looks even stronger than it is because the dollar is also soft. And that matters for forecasting. If the dollar reverses, if the Fed does something unexpected and the dollar strengthens, the shekel-dollar rate could move even if nothing changes in Israel. You'd see the rate tick up, shekels per dollar, and people would say, oh, the shekel is weakening, when actually it's just the dollar strengthening and the shekel might still be appreciating against the euro.
Which means anyone looking at the chart in isolation, just the USD-ILS line going down, is missing half the picture.
More than half. And Daniel's instinct that the geopolitical dimension is huge here is absolutely correct, but I think the specific weight of it gets misreported. Let me give you the actual framework that institutional analysts use for this pair. There are really four buckets. Bucket one: Israel's current account surplus. This is the structural story that's been driving shekel appreciation for a decade. Israel runs a persistent current account surplus, which means more foreign currency is flowing in than out. Tech exports, service exports, foreign direct investment into Israeli startups. That surplus creates structural demand for shekels. Foreign investors need to convert dollars to shekels to invest, and Israeli exporters convert their dollar revenues back to shekels to pay local costs. That's the engine.
That surplus has been remarkably sticky, even through security events.
That's the thing that surprises people. During the twenty fourteen Gaza conflict, the shekel barely budged. During the twenty twenty-one operation, same thing. The current account surplus is a cushion that absorbs a lot of the security risk premium that would otherwise show up in the rate. Bucket two is the interest rate differential. The Bank of Israel rate versus the Fed funds rate. Right now, the Bank of Israel rate is lower than the Fed's, which in theory should weaken the shekel, lower rates usually mean a weaker currency, but the current account surplus has been so large that it's overwhelmed the rate differential for years.
The textbook relationship breaks.
And that's where a lot of amateur analysis goes wrong. They look at rates and say, well, the Fed is higher, so the dollar should strengthen against the shekel, and then it doesn't, and they're confused. Bucket three is the security risk premium. This is the one that gets all the headlines but actually has a smaller and more transient effect than people think, except when it doesn't. A major escalation, a full-scale conflict, can spike the rate temporarily. We saw that in October twenty twenty-three, the rate jumped above four shekels to the dollar for a period. But it came back down. The market has learned, and this is a grim thing to say, that Israeli security crises tend to be intense but contained, and the underlying economic engine keeps running.
Bucket four is Bank of Israel intervention. The Bank of Israel has been one of the most active central banks in currency markets. They announced a thirty billion dollar intervention program in October twenty twenty-three to stabilize the shekel. They don't just let the market run. They have deep reserves, well over two hundred billion dollars, and they use them. When the shekel appreciates too fast, they buy dollars to slow it down. When it depreciates too fast, they sell dollars to support it. They're the market maker of last resort, and any forecast has to account for the fact that the central bank has both the willingness and the capacity to step in.
You've got this structural appreciation from the current account, a rate differential that's pointing the wrong way, a security premium that spikes and fades, and a central bank that actively manages the floor and the ceiling. That's already a lot of cross-currents before you even look at a chart.
That's just the Israeli side. On the dollar side, you've got the US fiscal picture, which is not great. The US is running deficits of six to seven percent of GDP. That puts structural downward pressure on the dollar over time. You've got the Fed's rate path, which the market is constantly repricing. You've got global risk appetite, when global markets are calm and risk-on, capital flows to smaller currencies like the shekel. When there's a risk-off shock, it flows back to the dollar. The shekel is basically a high-beta play on global risk sentiment.
If we're building the analyst's framework, the first thing you do is separate the signal into those components. What's the current account saying? What's the rate differential saying? What's the risk premium priced in? What's the Bank of Israel likely to tolerate?
And then you overlay the technical picture, which is what Daniel was really asking about. He mentioned looking at the five-year chart and seeing these periods of support, these little corrections where the downtrend pauses or reverses briefly before resuming. Those are real, and they're not random. There are specific technical levels that institutional desks watch.
Walk me through what a technical analyst at one of these desks is actually looking at on the USD-ILS chart right now. We're at two point nine. What are the levels that matter?
The first thing they're looking at is the long-term trend. The dollar-shekel has been in a multi-year downtrend. You can draw a trendline from the twenty fifteen highs, around three point nine, through the twenty eighteen highs, through the twenty twenty highs, and it slopes down steadily. The rate has been making lower highs and lower lows for a decade. That's the dominant technical signal: the trend is down. You don't fight the trend.
Which is the first thing they teach you in any trading course. The trend is your friend.
Until it isn't. And that's where support and resistance levels come in. Support is a price level where buying interest is strong enough to overcome selling pressure and prevent the price from falling further. On a chart, it looks like a floor. When the rate approaches two point nine, which is roughly where we are now, you look back at the chart and ask, has the rate bounced off this level before? If it has, that level becomes psychologically important. Traders remember it. Algorithms are programmed to watch it.
Two point nine specifically, what's the history there?
This is where it gets interesting. Two point nine isn't just a round number, though round numbers do matter in FX, they're psychological magnets. Two point nine is significant because it was the floor during the late nineties, the last time the shekel was this strong. The rate bottomed around two point eight, two point nine in nineteen ninety-seven, nineteen ninety-eight. That was a different Israeli economy, by the way, much less tech-driven, much smaller current account surplus. But the level itself is etched into the long-term chart. When you approach a twenty-five-year low, every trader on the desk is looking at that historical precedent and asking, is this the floor, or are we breaking through to something unprecedented?
If you break through a twenty-five-year support level, the next stop is uncharted territory. There's no historical anchor.
That's exactly the problem. Below two point eight, you're in the mid-nineties, and the economy was structurally different. The current account surplus didn't exist at that scale. The tech sector was a fraction of what it is now. So the historical comparison starts to break down. Some analysts would say, if we break two point eight, the next psychological level is two point five, which is just a round number with no real technical significance. Others would look at purchasing power parity models and say the shekel is already overvalued at these levels, so a reversal is due.
Let's talk about those pivot points Daniel mentioned. He described seeing tiny corrections, little upticks in the downtrend, and then the fall continues. What separates a temporary correction from an actual trend reversal?
This is the hardest question in technical analysis, and nobody gets it right consistently. But there are signals. The first is volume. When the rate bounces off a support level, you look at trading volume. If volume is low, it's probably just profit-taking, traders who were short the dollar, long the shekel, closing their positions. That's noise. If volume is high, if there's genuine buying interest at that level, it might be more significant. The second signal is the retest. A real support level gets tested multiple times. The rate approaches it, bounces, comes back down, bounces again. Each time it holds, the level gets stronger. If it holds three or four times, traders start to believe in it.
If it breaks, that's when you get the waterfall.
Or the rocket ship, depending on the direction. A break of a major support level, especially on high volume, is a powerful signal. It tells you that whatever was holding the price up, whether it was central bank intervention or natural buying interest, has been exhausted. The market has spoken. And then the old support becomes new resistance. If the rate falls through two point nine, then two point nine becomes the ceiling. Any rally back up to that level will be met with selling pressure.
That inversion of support into resistance is one of those things that sounds like voodoo until you see it happen a dozen times, and then you realize it's just mass psychology. People who bought at the old support level are now underwater, and they're desperate to get out at breakeven the moment the price comes back.
It's not magic. It's the aggregated pain threshold of everyone who made a bad call at that level. And in the shekel-dollar pair specifically, there's another technical factor that matters enormously: the moving averages. The fifty-day, the hundred-day, the two-hundred-day moving averages. These are just smoothed price lines, but they act as dynamic support and resistance. When the rate is below its two-hundred-day moving average, which it has been for most of the past decade, the trend is considered bearish for the dollar, bullish for the shekel. When the rate crosses above the two-hundred-day, that's a golden cross, or in this case it'd be a death cross for the shekel. That's a major signal that the trend might be reversing.
Does the two-hundred-day matter as much in a pair that's this manipulated by a central bank?
Less than it does in freely floating pairs, but it still matters because the algorithms trade off it. Even if the Bank of Israel is the dominant player, the algos are watching the moving averages, and their collective behavior creates self-fulfilling dynamics. If enough algos are programmed to sell when the rate touches the fifty-day moving average, then the rate will bounce off the fifty-day moving average, because the selling pressure materializes exactly there. It's a hall of mirrors, but it's real.
You've got trendlines, support and resistance levels, moving averages. What about the weirder stuff? Fibonacci retracements, Elliott waves, all the chart voodoo that some desks swear by?
I'll be honest, I'm skeptical of the more esoteric stuff. But I'll tell you why some desks still use it. It's not because they believe in the mathematical mysticism of the Fibonacci sequence. It's because other traders believe in it. If enough market participants are placing orders at the sixty-one point eight percent Fibonacci retracement level, then that level becomes significant regardless of whether there's any underlying logic. It's a coordination device. It's the same reason round numbers matter. There's no economic reason why one point zero zero euro-dollar should be important, but it is, because everyone is watching it.
It's the same logic as the two point nine level. It matters because people think it matters.
And that's not nothing. If you're advising a client on when to execute a large transfer, you can't ignore levels that the market is collectively treating as significant, even if you privately think they're arbitrary. You have to factor in the self-fulfilling prophecy.
Let's bring this back to the practical question. Someone is sitting on a pile of dollars, they need shekels in six months for a property purchase. They're looking at this chart, they see the rate at two point nine, a twenty-five-year low. What does the institutional framework tell them?
The first thing it tells them is that trying to time the exact bottom is a fool's errand. Even the best FX desks in the world get this wrong regularly. What they can do is manage the risk. The standard institutional approach for someone with a known future liability in a foreign currency is to hedge in tranches. You don't convert the whole amount at once. You convert a third now, you set limit orders for another third at levels you'd be happy with, and you keep the final third flexible.
Dollar-cost averaging, basically.
Yes, but with a twist. The twist is that you set your limit orders at those technical levels we just talked about. If the rate bounces up to three point zero, you buy. If it breaks below two point eight, you buy more, because at that point the trend might be breaking down further and you want to capture some shekels before it goes to two point five, if that's where it's headed. You're not trying to win. You're trying not to lose.
That distinction, between trying to win and trying not to lose, is the entire difference between speculation and hedging. Daniel made that point in the prompt. He's not trying to make a quick buck. He's trying to avoid getting crushed by a move in the wrong direction.
The speculator looks at the chart and says, I think the shekel is going to keep strengthening, so I'll wait. The hedger says, I don't know what's going to happen, and I have a real obligation in shekels, so I'll spread my risk across multiple outcomes. The speculator wants to maximize return. The hedger wants to minimize regret.
The minimize regret framework is underrated. If you convert everything now and the rate goes to two point five, you'll kick yourself. If you wait and the rate goes to three point five, you'll kick yourself harder. Splitting the difference means you'll always be partially right and partially wrong, which is the best most of us can hope for.
There's a behavioral economics dimension here that I think gets overlooked. The pain of a loss is about twice as powerful as the pleasure of an equivalent gain. That's the Kahneman and Tversky finding. So if you're converting dollars to shekels and the rate moves against you, the psychological cost of that loss is going to feel much worse than the satisfaction of having timed it right. The hedging strategy is designed to minimize that pain.
We've got the fundamental framework, the four buckets. We've got the technical framework, support and resistance, moving averages, trendlines. We've got the practical framework, hedge in tranches, minimize regret. What about the geopolitical wildcard? How does an analyst actually incorporate the headline risk from this region into a forecast?
This is where you see the real art of FX analysis, as opposed to the science. There are basically three approaches. Approach one is to ignore geopolitics entirely and just trade the trend. The argument is that over the long run, the structural factors, current account, tech exports, FDI, dominate, and the security noise cancels out. This has been a profitable strategy for most of the past decade. Approach two is to assign a probability-weighted risk premium. You model out scenarios: a major escalation, a ceasefire, a diplomatic breakthrough, and you assign probabilities to each. Then you calculate the expected value of the shekel under each scenario and blend them. This is what the big bank research desks do.
Approach three is to watch the options market. The implied volatility on shekel options, the price of insurance against large moves, tells you what the smart money actually thinks, as opposed to what the research reports say. When implied vol spikes, it means the market is pricing in a higher probability of a big move, in either direction. You don't need to know what's going to happen. You just need to know that the market is getting nervous, and that nervousness is itself a signal.
Right now, what's the vol saying?
It's elevated relative to the pre-October twenty twenty-three period, but it's come down significantly from the peaks. The market is pricing in a higher baseline level of uncertainty, which makes sense given the regional situation. But it's not pricing in an imminent catastrophe. It's more of a chronic low-grade anxiety than an acute panic.
Which tracks with the broader pattern of this conflict. Periods of intense violence followed by periods of uneasy quiet, and the economic engine keeps running through both.
That pattern itself has become priced in. The market has learned that Israeli security crises tend to follow a certain rhythm, and it's adapted. The spikes are sharper but shorter. The recoveries are faster. The memory of the market is longer than it used to be.
Let me push on something. You said the structural factors dominate over the long run. But what if the structural factors themselves are changing? The tech sector in Israel is facing headwinds. There's the global AI shift, there's the concentration risk of being so dependent on a handful of large exits and a steady stream of foreign investment. If the current account surplus starts to shrink, the whole fundamental story changes.
That's the right question to ask, and it's what the best analysts are spending their time on. The shekel's strength is not a law of nature. It's the product of specific conditions: a tech sector that generates massive export revenues with relatively low import intensity, a gas sector that's reduced energy imports, and a central bank that's managed the rate actively. If any of those conditions change, the rate changes. The risk that keeps me up, if I were running an FX desk, is the tech concentration risk. Israel's current account surplus is heavily dependent on a few hundred companies. If the global AI revolution changes the economics of software development, if Israeli startups lose their competitive edge, if foreign investment shifts to other hubs, the surplus could narrow faster than anyone expects.
That would be a regime change, not just a correction. The trend would break, and the technical levels would become irrelevant because the underlying fundamentals that created them would be gone.
Technical analysis works until the world changes. The support levels, the trendlines, the moving averages, they all assume that the future will resemble the past. If the structural story shifts, the chart becomes a record of a world that no longer exists. And that's why the best FX analysis combines both lenses. You use the fundamentals to understand whether the world has changed. You use the technicals to understand where the market's attention is focused right now. Neither one alone is sufficient.
If we're writing the Goldman Sachs report, the one Daniel imagined us producing, what's the summary? What goes in the executive brief?
The summary is that the dollar-shekel is at a historic inflection point. The long-term trend is down, driven by structural factors that remain largely intact: a robust current account surplus, a dynamic tech sector, and a central bank with deep pockets. The rate at two point nine is testing a twenty-five-year support level. A break below two point eight would signal a new regime, with no clear historical floor. The primary risks to the shekel are an escalation in regional security tensions, a narrowing of the current account surplus driven by tech sector headwinds, or a sharp dollar strengthening on the back of Fed policy surprises. The primary supports for further shekel appreciation are continued tech export growth, foreign direct investment inflows, and the Bank of Israel's demonstrated willingness to let the shekel strengthen to fight inflation. For clients with upcoming shekel liabilities, we recommend a phased hedging approach, converting in thirds over the next six months, with limit orders set at technical support levels. Do not attempt to time the exact bottom. Minimize regret, not maximize return.
That's the report. And the beauty of it is that it's honest about what we don't know. The best analysts are the ones who can say, here's the range of outcomes, here's what would drive each one, and here's how to position yourself so that no single outcome is catastrophic.
That's the thing Daniel was really asking. He wasn't asking for a prediction. He was asking for a framework. How do you think about this problem? What are the inputs? How do they fit together? And the answer is, you look at the fundamentals to understand the direction of travel, you look at the technicals to understand the levels where the market might pause or reverse, and you structure your own behavior to be robust across multiple scenarios.
The other thing that's implicit in his question is the difference between the professional and the amateur approach. The amateur looks at the chart and sees a story. The dollar has been falling, so it will keep falling. Or, the dollar has fallen too far, so it must bounce. Those are narratives. The professional sees a probability distribution. There's a range of possible outcomes, each with some likelihood, and the goal is to position yourself so that the weighted average of those outcomes is acceptable.
The professional knows that the biggest risk is always the one you're not thinking about. The black swan. In the shekel-dollar pair, the black swan could be anything. A major discovery of natural gas that changes the trade balance. A political realignment that changes the relationship with the US. A technological breakthrough that makes Israeli tech even more valuable. Or a technological disruption that makes it less valuable. The point is, you can't predict the black swan. You can only build a portfolio, or in this case a hedging strategy, that can survive it.
There's a humility in that approach that I find appealing. The market is smarter than you. It's processing more information than you ever could. Your job isn't to outsmart it. Your job is to understand it well enough to protect yourself.
To know when to act. One of the mistakes I see people make with large transfers is analysis paralysis. They get so deep into the charts and the fundamentals that they can't pull the trigger. They're waiting for the perfect moment, which doesn't exist. The institutional approach is to set your levels in advance, place your orders, and walk away. You make your decisions when you're calm, not when the rate is moving and your emotions are running high.
That's the behavioral discipline that separates professionals from amateurs more than any analytical skill. The amateur trades on emotion. The professional trades on a plan that was designed to neutralize emotion.
The plan doesn't have to be complicated. The three-tranche approach we described is simple enough that anyone can do it. It doesn't require a Bloomberg terminal. It just requires the discipline to spread your risk and the humility to admit you can't call the bottom.
To wrap the analytical framework: fundamentals give you the direction, technicals give you the levels, and discipline gives you the execution. Miss any one of those three, and you're gambling, not hedging.
On the fundamentals specifically, for anyone watching this rate, the single number to track isn't the exchange rate itself. It's the current account surplus as a percentage of GDP. As long as that number is healthy, above three or four percent, the shekel has a structural bid. If it starts to narrow, if it drops below two percent, below one percent, that's when you need to reassess the entire thesis. That's the canary in the coal mine.
The other number to watch is the Bank of Israel's foreign exchange reserves. If they start drawing them down aggressively to defend a level, that tells you the market pressure is stronger than their willingness to intervene. If reserves are stable or growing, the central bank has room to manage the rate. If they're shrinking fast, the market is testing their resolve.
Those two numbers, the current account surplus and the reserve level, will tell you more about where this rate is going than any chart pattern. The chart tells you where the market has been. The fundamentals tell you where the pressure is building.
Right now, the pressure is still toward a stronger shekel. The current account surplus is intact. The reserves are massive. The trend is down. But we're at a twenty-five-year low, and that means the risk-reward of betting on further appreciation is getting worse, even if the probability of further appreciation is still high.
That's the asymmetry that a good hedging strategy captures. If you're wrong about further appreciation and the rate bounces, you've protected yourself. If you're right and it keeps falling, you've still captured some of the move with your later tranches. You're never perfectly right, but you're never catastrophically wrong. And in FX, avoiding the catastrophe is the whole game.
Now: Hilbert's daily fun fact.
Hilbert: In the late Victorian period, crofters in the Outer Hebrides cultivated a strain of bere barley so well-adapted to the alkaline machair soil that when they later switched to higher-yielding modern varieties, the bere's deep root systems had been the only thing preventing catastrophic coastal erosion along entire island shorelines.
...right.
This has been My Weird Prompts. If you enjoyed this episode, please leave us a review wherever you get your podcasts. It helps other people find the show. We're at myweirdprompts.com for past episodes and transcripts. I'm Corn.
I'm Herman Poppleberry. We'll catch you next time.
