The leu loses its bearings

• Indirect intervention of the Central Bank suspected

Yesterday, the NBR announced an exchange rate of 4.3523 lei for an Euro, a new historic high against the Romanian currency. Exchange houses were buying Euros at 4.15 lei, while selling them at 4.44 lei. These figures were similar to those of Monday, with demand for Euros dropping. However, on the interbank market, the Euro passed the 4.4 lei/Euros threshold, towards the end of the session.

On Monday, the leu had dropped to a historic low against the Euro, with the central bank announcing an exchange rate of 4.3257 lei / Euro, while the Central Bank was apparently absent from the market.

The analysts of ING Bank consider that after the Constitutional Court decided that the 15% pension cuts introduced in the new fiscal laws were unconstitutional, while leaving the 25% wage cuts unchanged, Romania is one step closer to receiving the next installment of the loan from the IMF. "We believe this will happen in the beginning of July and should support the national currency in the short term", analysts say.

Nicolaie Chidesciuc, the chief-economist of ING Bank said that the rise of the Euro could stop today, and added that the Central Bank could stop the depreciation of the leu if it wanted to.

"Whereas over the last two years, the NBR has strongly fought to prevent the depreciation of the leu, it is now allowing precisely that to happen, in spite of the messages that various of its officials were sending out", said Mr. Chidesciuc.

Georgiana Constantinescu, an analyst with Credit Europe Bank, yesterday said that the market was calmer yesterday. "Several players sold Euros yesterday. It is possible that the NBR intervened in the market directly, through other players, in order to weaken the Euro", he said. Analysts say that the foreign market climate is also harming the exchange rate.

• Very few companies use hedging strategies

Mirela Şerban, Managing Partner R&M Audit, says that over 70% of the SMEs that deal in exports and imports remain exposed against the foreign exchange risk, since they use no hedging strategies (ed. note: transferring the foreign exchange risk to third parties) which would protect importers against the appreciation of the Euro, or protect defenders exporters against its depreciation. "Unfortunately, hedging strategies are only used by major local companies and by multinationals; most of the medium and small companies remain exposed to the currency risk, which is yet another factor that negatively affects their cashflow, under the current crisis circumstances", said Mirela Şerban.

When it comes to importers, the appreciation of the European currency involves an enormous risk, since they import merchandise that they put on sale at a certain level of the exchange rate, and if the Euro strengthens against the leu, when they need to buy Euros to pay off the merchandise they bought, they need more lei than initially predicted or then the amount they made. In the case of exporters, they sell their products on the foreign market, and they record their production costs at a certain exchange rate. If by the time they get the money for their products, the Euro depreciates against the leu, when they sell their Euros they will get less lei than the amount they invested in production.

"In the first quarter of 2010, the exchange rate of the NBR moved from 4.2265 lei for a Euro on January 4th, to 4.0958 lei for a Euro on March 31st, or a fluctuation of 3.09%. Starting with April 1st, until now, the exchange rate went the other way, going above 4.2800 lei for a Euro. For exporters, or importers, who didn"t protect themselves against the currency risk, these were losses that on one hand have affected the profit, and on the other hand the cashflow needed for their day to day operations, as the entire market is affected by the lack of liquidity", said Mirela Şerban. She said that prior to the economic crisis, a loss of 3- 4% was bearable, as it was more than adequately made back on the trade markup, but now exporters are forced to keep their prices as low as possible, to remain competitive on the foreign markets, and importers lower their prices because domestic consumption is extremely low. In other words, exchange rate fluctuations now make a big difference. "The currency fluctuations are one of the few factors that managers can avoid worrying about at a time like this", Mirela Şerban said.