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Romanian currency plummets 2% amidst escalating political upheaval

Romanian currency weakens further: BNR announces a 1.2% daily drop in the official exchange rate, pushing the local currency towards RON 5.1 to euro. This marks a 2% decrease from the previous long-term rate of nearly RON 5.0 to euro. Stabilization occurred in the secondary market as well.

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Romanian currency weakens further: BNR announces a mid-day exchange rate reduction of 1.2% on May...
Romanian currency weakens further: BNR announces a mid-day exchange rate reduction of 1.2% on May 6, pushing the local currency toward RON 5.1 to the euro, a 2% drop from the long-term average of around RON 4.95 to the euro. The secondary market also reflects this downward trend.

Romanian currency plummets 2% amidst escalating political upheaval

In the heart of Europe, the Romanian Leu (RON) is taking a beating as political uncertainty looms large. Over the past couple of days, the local currency has been shedding its value, with the exchange rate hovering around RON 5.1 to euro – marking a significant drop of 2% from the RON 4.9 to euro seen for quite some time. The cause? Anxiety-laden market movements fueled by political instability shaking the community following the initial round of presidential elections.

The political vibes are expected to stay stormy until the decisive vote on May 18, maintaining a high level of volatility in the foreign exchange market. This doesn't bode well for the Romanian Leu, which could sink further under a pessimistic outlook, predictions suggest. On the brighter side, a more positive election result might help restore some stability to the country's forex market.

There's no denying that the Leu has been on a rollercoaster ride for a while but, fundamentally speaking, it has been strengthening in real terms over the past few years. The recent depreciation may have been influenced by the single factor that has been able to puncture the currency's armour of resilience – political strife.

"If the Leu doesn't recover in the coming days, it signals that the National Bank of Romania (BNR) has been eyeing this moment for a long time, waiting for an opportunity to permit the Leu to depreciate," explained Dragos Cabat, a member of the CFA Board of Directors and co-founder of Cabat&Pah Investments.

The pressure on the exchange rate is evidently due to foreign investors seemingly all saying, "Time to cash out and hit the road." Investors, who currently hold a whopping 52% of Romanian government bonds (a share that has escalated sharply over the past five years), are jittery due to concerns about a possible win by isolationist presidential candidate George Simion, whose tenure could pose challenges to the country's public financing in the long run.

The BNR tried to stem the tide by attracting liquidity from the market after capital inflows slowed and outflows escalated dramatically, leading to an increase in interest rates. However, this move hasn't managed to deter anxious traders in the government debt interbank market who are reportedly placing massive sale orders.

"It's a chaotic situation out there, worse than even during the pandemic. Everybody wants to get out and sell! The contribution of foreign investors is essential to Romania's economic growth, and they're bailing now," a bank treasurer confided to Economica.

Analysts predict that, under a pessimistic scenario, the Romanian Leu could depreciate by up to 20%. Yet, a "positive" outcome of the presidential elections on May 18 could help stabilize the currency's flux on the country's forex market. Market dynamics could be significantly impacted by the election outcome, potentially leading to increased investor confidence, reduced volatility, and a possible change in the BNR's monetary policy.

The isolationist candidate George Simion emerged victorious in the initial round of the presidential elections, fostering expectations for a win in the final round. Simion's party, Alliance for the Union of Romanians (AUR), is known for its unconventional strategies aimed at gradually recovering, through fair compensation, the country's strategic companies like OMV Petrom. Simion has also pledged to appoint Calin Georgescu, a highly popular far-right politician with radical nationalist economic rhetoric.

(Photo: Breeze393/ Dreamstime)

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  1. The political instability in Romania, as seen after the initial round of presidential elections, has been causing concern for the Romanian Leu (RON), with the exchange rate dropping by 2%.
  2. Foreign investors, who hold a significant 52% of Romanian government bonds, are showing signs of unease due to the potential win by isolationist presidential candidate George Simion.
  3. Dragos Cabat, a member of the CFA Board of Directors, suggests that the recent depreciation of the Leu might be the National Bank of Romania (BNR)'s long-awaited opportunity to permit the currency to depreciate.
  4. Analysts predict that a pessimistic scenario, such as the election of Simion as president, could lead to the Leu depreciating by up to 20%.
  5. The outcome of the presidential elections on May 18 could significantly impact the Romanian Leu's stability in the forex market, potentially influencing market dynamics, investor confidence, and the BNR's monetary policy.

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