Wednesday, December 17, 2008

Romania seen playing tug-of-war with mkts

By Luiza Ilie
BUCHAREST, Dec 16 (Reuters) - Romania's central bank may have stepped into the market repeatedly in recent days to stop the leu from slicing through the key level of 4 per euro due to worries about fiscal policies of the new centre-left government.

Central bankers make no comments on such market talk, but dealers say they suspected covert intervention on Monday when the leu quickly retraced losses after the prime minister- designate gave up his nomination, raising fears of political instability.

Political concerns refer to the likelihood the new government, expected to be in place by the end of the month, fails to impose sufficient fiscal discipline to prevent the global cash squeeze from igniting a financing crisis.

"It has been surprising how well the leu has held up, because of all economic problems and political uncertainty it would have gone beyond 4," said one trader in London.

The leu has made swift recoveries frequently in recent weeks, even as markets struggled to get a clear reading of policy plans after an inconclusive parliamentary election last month that led to the creation of a broad coalition.

Many say commercial flows, largely related to profit repatriation and demand from importers ahead of Christmas should also have depressed the leu beyond current levels.

On Tuesday, the leu traded at 3.9575 per euro, within reach of Monday's two-month low of 3.96 and October's four-year low of 3.9860. It has lost 8 percent in six weeks.

"The leu is a difficult currency. The market is not as open as it is in Hungary or Poland, the central bank is intervening a lot," said the London trader.

The Romanian central bank last acknowledged stepping into the market in October, when it said it sold 40 million euros in direct intervention that analysts said was meant to smooth the leu's depreciation and protect its inflation goals.

Dealers say there could be more room for intervention this year as central bankers may be wary of an additional burden from a weaker leu on consumers ahead of the Christmas break.

"They're not out to reverse the depreciation trend, just avoid wild swings, but they will not let the leu go over 4 over Christmas holiday, that will upset households," one dealer said.

But some said further declines in the leu are inevitable as the Romanian economy slows sharply in 2009.

"The leu is still in the grip of the central bank but we believe ... (it) could let EUR/RON go above 4.0," said Bartosz Pawlowski of the Toronto Dominion Bank in a research note.

"Otherwise, the Romanian economy could be additionally crippled, thus losing competitive advantage against its regional peers."

After several years of strong growth that has doubled the size of the economy in the last 4 years, Romania is widely expected to lose steam in 2009, with at least a halving of this year's expansion of around 9 percent. (Editing by Stephen Nisbet)

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