Thursday, March 24, 2011

Romania’s Leu Rally is ‘Market Driven,’ Central Banker Cristian Popa Says

The Romanian leu’s rally to its strongest level in almost a year is “market driven and appears to be broadly in line with economic fundamentals,” Deputy Governor Cristian Popa said.

The Banca Nationala a Romaniei reiterates that it “remains preoccupied” with possible excess volatility of the leu exchange rate, “should it occur,” Popa said today in response to questions from Bloomberg on what justifies the current leu appreciation.

The leu through yesterday has been 2011’s best performer against both the dollar and the euro of more than 170 currencies tracked by Bloomberg. It gained as much as 0.5 percent after Popa’s comments and traded at 4.103 against the euro as of 5:37 p.m. in Bucharest today. That brings the rise to 4 percent against the euro and 9.8 percent versus the dollar in 2011.

“The relatively more significant recent strengthening against the dollar” should help “anchor inflation expectations stemming from increases in the world price of oil and fuels,” Popa said.

Popa’s comments show “that the currency move is good for inflation expectations,” which “opened up the prospect for more,” said Peter Attard Montalto, an economist at Nomura Plc inLondon. “Overall, I think the risk here is that markets push them too far too fast given we are now seeing quite a bit of fast money interest.”
‘Mounting’ Risks

The leu may appreciate to 4.05 per euro as the central bank “is much more comfortable about currency strength given mounting inflation risks,” emerging-markets strategists at Societe Generale SA in London wrote in a report today.

Annual inflation quickened to 7.6 percent in February from 7 percent in the previous month, the statistics office in Bucharest reported on March 10.

Recent price growth “should be viewed against the background of a certain tightening of broad monetary conditions where, besides the level of the policy rate and of minimum reserve requirements, exchange-rate evolutions and changes in interbank money market rates also play a role,” Popa said.

The central bank kept its benchmark interest rate unchanged at a record-low 6.25 percent for a sixth meeting on Feb. 3. The next rate-setting meeting is scheduled for March 31.

To contact the reporter on this story: Andra Timu in Bucharest at atimu@bloomberg.net.

To contact the editor responsible for this story: James M. Gomez in Prague atjagomez@bloomberg.net

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