Historic High: Euro/Leu Rate Breaks 5 Lei Barrier, Says BNR

The yield on 10-year lei-denominated bonds rose more than 50 basis points this week to above 8%, while the benchmark Bucharest stock index fell about 3%. Romanian dollar bonds due in 2035 were among the worst performers in emerging markets on Tuesday.

Interbank market trading indicated that the leu had been under strong pressure in recent days, according to Valentin Tataru, chief economist at ING Bank Romania. ING maintains its year-end forecast of 5.05 lei per euro, although some breakouts closer to 5.10 are possible in the near term, he said.

Romanian assets fell on Tuesday after a far-right leader won the first round of a presidential runoff, while other emerging market assets rose, Reuters news agency, one of the world’s leading sources of financial information, reported. A Simion victory could isolate Romania, erode private investment and destabilize NATO’s eastern flank, political observers said, according to the news agency.

“If a far-right candidate were to become president, Romania’s foreign policy could become more problematic in the event of an anti-European shift,” said Anca Maria Negrescu, senior economist at Unicredit, quoted by Reuters. “There is a potential risk of some instability for the government, as it currently relies on a fragmented majority,” she added.

In his turn, Michał Jóźwiak, Market Analyst at global financial services firm Ebury said in an analysis:

“For the first time since September 2023, the EUR/RON pair broke out of the very tight range, posting a 2% increase in a matter of minutes today. We attribute the move to a complex chain of events in the political arena, resulting in a capital outflow from the country. The behaviour of the exchange rate also points to a consequent heavy NBR intervention to stabilise the market, as implicitly confirmed by Dan Suciu, the NBR spokesperson.

“It could all be traced back to last year’s presidential elections, cancelled due to allegations of Russian interference and illegal campaign financing favouring the winner of the first round, Călin Georgescu. Since then, the far-right momentum has been on the rise, which found an outlet in a triumphant victory of George Simion in the first round of a presidential re-run.

“What is surpassing is not the victory itself, which was widely expected, but its scale, for the race promised to be a very tight one, with the market attributing almost equal chances of victory to both Simion, Dan and Antonescu. In the end, Simion garnered over 40% of the vote, becoming the clear favourite for the ultimate victory, while the ruling coalition’s candidate, Antonescu, did not even make it into the second round.

“This prompted Marcel Ciolacu to resign from his post as the prime minister – he indicated that in its current form, the coalition no longer has legitimacy. Because of the government’s collapse, parliamentary elections must be held within 45 days. What could be expected is not only a strong showing from the far right, but also the controversial Georgescu’s return to the political mainstream, possibly at the top position in Romania’s political scheme.

“With Romania already boasting twin deficits and the geopolitical situation in the area tense, this added to the uncertainty about the future economic outlook, with the 10-year bond yields up by over 50 bp. since the beginning of the week.

“Sentiment towards Romania is very fragile right now, and scenarios of currency devaluation cannot be overlooked. The leu has found itself in uncharted waters, with the NBR likely needing to remain active to prevent EUR/RON from breaking higher in the near term.

“The bank is said to have spent over 10 billion euros on interventions in 2024. For the moment, the focus is on the second round of presidential elections (May 18), which could be a pivotal moment for Romania’s future.”