RON Hits 6-Month High Is The Leu Under Attack?

• Economist Calin Rechea: "The exchange rate will be maintained at a reasonable level, at least until the presidential elections."

The RON lost 0.46 per cent yesterday, dropping approximately two hundredths to 4.2747 RON/EUR, in line with the other currencies in the region. This is the lowest exchange rate in the last six months, after a few days of excessive volatility.

National Bank Governor Mugur Isarescu last week delivered a more or less conspicuous message to those preparing to launch a possible attack on the leu. "I do not see it as a negative factor that the leu is less volatile (...) The market can be liquid, but someone in London, for instance, may say that there is not enough liquidity. The market does have lei. I am making this statement taking the risk of being misunderstood," he said. Asked about the possibility of a new attack on the leu, Governor Isarescu said: "Of course, they are trying, but we are watching them. A severe attack took place in October 2008, when the national currency was put to a hard test by foreign speculators.

A precarious economy, political uncertainties and a high budget deficit are weakening the investors" perception of Romania and indirectly contribute to the depreciation of the national currency. "Additional pressure is put on Eastern European currencies and such pressures are stronger in Romania, considering that the financial market is weaker," said Laurian Lungu, the Managing Partner of Macroanalitica.

In his opinion, the significant depreciation of the leu against the euro in the recent past is caused by "the September effect." He explained that September was the month when traders returned from vacation and start reacting to events that had happened over the summer. Additional caution on their part also has effects on the financial market.

Adrian Vasilescu, advisor to the Governor of the National Bank, believes that the depreciation of the RON is caused by fluctuations in supply and demand, which is not necessarily a sign of speculative attacks.

Economist Calin Rechea believes that, if this is indeed a speculative attack, the recent decline is just a test to see the strength of the reaction. In such scenario, the National Bank"s desire to maintain the national currency within a small range of fluctuation will soon be met with stronger attacks. In his opinion, the exchange rate will be maintained at a reasonable level, at least until the presidential elections, as a result of the political pressures to be put on the National Bank.

"Nevertheless, the Government needs to cut spending in order to slow down the growth of the budget deficit, which is a source of pressure on the exchange rate, especially considering the significant decline in revenues and in the volume of foreign exchange sent home by Romanians working abroad, which constitute an important support for the exchange rate," Rechea added.

In turn, dealers working for private banks believe that the current level of liquidity on the market in Romania is lower than on other markets in the region. Moreover, corporate foreign exchange dealers are more or less idle for the time being.

Another category of dealers believe that, although its current level is satisfactory, liquidity is not evenly distributed, and that is causing the current exchange rate fluctuations.