RO: 5.10 seems the new line in the sand for EUR/RON

RON depreciated to 5.0950 against EUR today around noon from 4.9750 in the morning on political turmoil after the first round of presidential elections.

We think that 5.10 is the new line in the sand for the NBR. Strong FX pass-through to inflation and the important role played by the EUR/RON for consumer confidence should limit further abrupt depreciation of the RON in the short-term. Weak fundamentals related to high twin deficits speak in favor of further RON weaking in small steps over the next years.

RON was unusually stable since 2022, with nominal depreciation below 1.0% per year, on average. Before that, the norm was an annual depreciation of the RON around 2.0%, close to the inflation differential between Romania and the Eurozone. Multiple shocks, from strained supply chains after the pandemic to the war in Ukraine did not allow a stronger depreciation of the leu under the NBRs managed floating FX regime. The cost of RON stability was eroded competitiveness for local exporters.

Turnover on the local FX market increased significantly on Monday and Tuesday, with daily traded volumes twice as high as weekly volumes during normal trading times. Daily turnover increased also on the Bucharest Stock Exchange and ROMGBs yields jumped, with a steeper move at the short end of the curve.