The leu, more sensitive to repos than to the political scene

• Analysts are predicting a smaller fluctuation of the leu after the decision of the Constitutional Court

The leu yesterday depreciated against the Euro, after gaining for four consecutive sessions. The national currency fell almost continuously over the course of last month, as well as in the first days of this month, amid the political tensions. The trend reversed on August 6th, when the National Bank of Romania (NBR) announced it would cap the amounts it would lend to banks in repo operations at six billion lei. On that day, the exchange rate fell to 4.5740 lei/euro, more than seven bani below the amount recorded during the previous sessions. The drop continued for more than three sessions, with the Euro trading at 4.5362 lei on August 3rd. On the next session there was a slight rise, and then on August 13th, when the NBR announced another capping of the amounts lend in repo operations, to 5 billion lei, the exchange rate fell by almost 1 ban, to 4.5307 lei/Euro. The downward trend has remained in place for the entire week.

Yesterday the third consecutive repo cap was implemented. The Central Bank only offered lenders four billion lei, even though demand was more than three times greater. In spite of that, the leu no longer gained against the Euro.

• Aurelian Dochia: The NBR is faced with a compromise

The NBR is currently faced with a compromise, economic analyst Aurelian Dochia considers. The policy of the Central Bank to cap the amounts offered on repo has stabilized the exchange rate, but at the same time could lead to a significant increase in interest rates, which would affect the financing of the budget deficit, he explained. "The NBR is fighting on two fronts and it can't win on both. There is an interest in showing that the volatility of the exchange rate is not that big, but on the other hand, if the interest rate will continue to increase, we will probably see a more relaxed monetary policy from the Central Bank", said Aurelian Dochia.

The economic analyst does not expect the markets to react immediately to the decision of the Constitutional Court, because they have already weighed the three scenarios which seem to be most probable, namely the validation of the referendum, its invalidation or the postponement of the decision.

In the medium and long term however, the evolution of the exchange rate will depend on the policies of the Central Bank, as well as on the development of the political scene, he warned.

Aurelian Dochia considers that it is difficult to say which of the first two alternatives would be better, but stressed that the most harmful scenario would be to postpone the decision of the Court.

• Dragoş Cabat: Limiting the amounts offered on repo, only possible in the short term

The NBR can only implement the measure to cap the amounts it will lend to banks in the short term, said financial analyst Dragoş Cabat. If the Central Bank will continue to cap these amounts, there is the risk that banks will refuse to buy government bonds in the absence of increasing yields, he explained. "If the NBR will not give the banks lei with which to buy Euros, demand for government bonds would be severely affected", said Dragoş Cabat.

• ING: The decision of the Constitutional Court will not have a positive effect

The decision of the Constitutional Court (CCR) concerning the referendum for the dismissal of the president will not have positive effects, regardless of what it will be, a report by ING states. If the referendum is invalidated, and Traian Băsescu returns to Cotroceni, this would escalate the political war, said Vlad Muscalu, economist with the group.

If the CCR validates the referendum, and the president is dismissed, early presidential elections would follow, which runs the risk of escalating the possible fiscal overruns, which would cause even further foreign criticism, according to him. Not even the alternative where the Court does not make a decision would be favorable, because it would extend the uncertainty, the analyst said, who considers that this situation is also the least likely, as a decision needs to be made by at least six of the nine judges.

According to ING, the strengthening of the leu seems to have lost its momentum, which is supported by its sideways moves, and by the absence of a clear show of support from the NBR. "Negative price action on the main equity markets suggest that the leu could continue to weaken today, but the memory of the recent (assumed) interventions should limit its extent", Vlad Muscalu also said.

The exchange rate yesterday closed near 4.5 lei/Euro. The Euro also depreciated against the dollar yesterday, to 3.6404 lei, and against the Swiss Franc, which rose to 3.7413 lei.