Israel ETF Rises As Central Bank Double Dips On Rate Cuts

May.28.13 | About: iShares MSCI (EIS)

By: The ETF Professor

Shares of the iShares MSCI Israel Capped Investable Market Index Fund (NYSEARCA:EIS), the lone Israel ETF, are up nearly two percent Tuesday after the Bank of Israel pared interest rates for the second time in two weeks. On Monday, the central bank trimmed borrowing costs by 25 basis points to 1.25 percent.

That news followed an announcement by Bank of Israel on May 13 that saw the bank unveil a rate cut of 25 basis points to 1.5 percent and a plan to purchase $2.1 billion in foreign currency in an effort to weaken the country's currency, the shekel.

The rate cut announced earlier this month had the desired impact of weakening the shekel against the dollar, taking the Israeli currency down almost one percent against the greenback. However, the most recent announcement has yet to bear such fruit as the shekel traded higher against the dollar, rising above Bank of Israel's desired maximum exchange rate of 3.70.

While the rate cut on May 13 was viewed as a surprise by market participants, Monday's news out of Israel was not as unexpected. Bank of Israel Governor Stanley Fischer steps down in a couple of weeks and it has become apparent he wants to his departing legacy to include weakening the shekel to help Israeli exporters.

Fischer has lowered the benchmark rate from 3.25 percent in 2011 in an effort to help exporters, which account for 40 percent of Israeli GDP, Bloomberg reported.

Fischer does have a rate-cutting reputation. As Bloomberg noted, he was the first central banker to cut rates in 2008 during the dark days of the global financial crisis and did so twice in November of that year.

In terms of the rate cuts' impact on EIS, an interesting scenario has emerged. The ETF lost 0.7 percent since the last rate reduction before the start of trading today. Not only that, but following the May 13 rate cut, EIS had $82.6 million in assets under management. The ETF entered trading Tuesday with $76.6 million in assets.

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