(Bloomberg) — Israel’s shekel headed for the biggest three-day selloff in two years and the nation’s bonds tumbled as traders worried the killing of Hamas political leader Ismail Haniyeh on Iran’s soil raised the danger of a broader Middle East war.
The currency fell as much as 1.2% to 3.7886 per US dollar after Hamas blamed Israel for the airstrike in Tehran. That took its three-day decline to 3.3%, the worst in the world only after the recently floated Ethiopian birr. Israel’s 10-year sovereign yield rose 6 basis points to 4.99%, while dollar bonds posted the biggest losses in emerging markets.
In nearly 10 months of war between Israel and Hamas, investors had repeatedly hoped for a return to peace, leading to sporadic resilience in the shekel as well as the country’s stock and bond markets. But as cease-fire talks in Gaza drag on, the latest events have eroded traders’ optimism in a quick resolution, and fear is growing that Iran and its allies will be drawn into direct conflict with Israel.
“It is difficult to see a scenario where Iran does not respond given that this was an attack not just on Iranian soil, but targeting a guest of the new President in Tehran itself,” said Nick Rees, FX strategist at Monex Europe Ltd. in London. “It is hard to see a scenario where the shekel does not continue to trade under pressure, unless and until both sides step back from the brink.”
This week’s selloff has pushed the shekel to trade near the weakest level since April after it breached multiple support levels at the 50-day, 100-day and 200-day moving averages. Its volatility is surging too: one-month implied swings, based on options prices, have jumped for five successive days, the longest streak since November.
On Wednesday, the 10 worst performers in a Bloomberg gauge of sovereign dollar bonds were all from Israel. The 2043 note lost 1.1 cent on the dollar, halting a four-day rally.
Iran’s Foreign Ministry Spokesman Nasser Kanaani said Haniyeh’s killing “will strengthen the deep and unbreakable bond between the Islamic Republic of Iran, dear Palestine and the resistance.”
Meanwhile, Lebanon’s Prime Minister Najib Mikati warned of things “getting worse” and the Houthis condemned what they called an “Israeli assassination” and “great escalation.”
(Updates with bond moves in first, second and a new sixth paragraph.)
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