Most forecasts show the leu at 4.45 to 4.55 to the euro by the end of 2013, but analysts do not rule out instances of more than 4.6 to the euro. The most optimistic forecast came from BRD analysts, who see the leu at 4.42 points to the euro in December 2013. The leu ended 2012 at 4.43 to the euro, up 2.5% on December 2011.
“We are taking into account a less than 3% depreciation of the leu this year. If the appetite for risk remains high, the high yield of the leu-denominated assets will be a magnet for foreign capital. Still, the volatile nature of capital inflows entails depreciation risks in case of sudden changes in sentiment, and this was as obvious as possible in 2012,” said Catalina Molnar, chief economist of UniCredit Tiriac Bank.
The leu has gained ground against the euro over the last few months because of the positive foreign investor sentiment as a result of the political situation stabilizing, after turmoil thereof and euro zone crisis took the exchange rate to a high of RON4.65/EUR in the summer.
Analysts believe it is difficult for the leu to keep appreciating and say the central bank might intervene on the market to contain it precisely to avoid a too high volatility in case the foreign investor sentiment deteriorates.
An intervention of the central bank to contain the leu appreciation would also be justified if the BNR were to improve its foreign currency reserve this way considering it has to repay part of the International Monetary Fund loan. The payments to the IMF are expected to make a significant impact on the leu.
“Despite increased domestic political stability, the leu will be influenced by the busy IMF payment schedule. A sudden and significant depreciation of the leu will be avoided in 2013, as inflation is much higher than the central bank’s target and the Romanian economy remains sensitive to exchange rate trends,” believes Eugen Sinca, analyst with BCR, the largest local bank.
Sinca sees the leu exchange rate as volatile as in 2012 and expects it to go from 4.4 to 4.7 to one euro this year. The central bank contained last year’s volatility by constant interventions on the market for fear the leu depreciation might affect the inflation.
BRD analysts provided the most optimist forecast, as they see the leu at 4.42 to the euro at the end of December. Garanti expects it to be at 4.55 at the end of the year while RBS and Raiffeisen estimate 4.47 and 4.55 to the euro for this fall.
Analysts expected an exchange rate of RON4.55-RON4.6/EUR for the end of 2012, but the trend of the leu in the last few weeks of the year proved them wrong. The leu gained 2.5% in December because of the high demand from foreign investors.
“Once the new government has taken office, the exchange rate will probably stabilize to lower levels than in the fall of last year. The leu purchases from the forex market may have been made for foreign investors to invest in Romanian government paper, with the extraordinary results of the latest auctions of the Finance Ministry to prove it,” says Florentina Cozmanca, senior economist of RBS Bank.
The leu lost 2.5% to the euro in 2012, its sixth year of decline against the European currency. It lost almost 11% over the last few years alone, because of the difficult economy. Even though the leu depreciation helped exports, it also created tremendous pressure for those with loans in foreign currency and drove prices up.
The leu lost more than 3% against the Swiss franc and 0.5% against the dollar. The leu-dollar rate was the most volatile of all last year. The dollar gained 20% on the leu in several months at the beginning of the year and the leu offset most of the loss by the end of the year.
(English version by Loredana Fratila-Cristescu)