By Win Thin, Senior Currency Strategist, BBH
Developments in Romania today support our recent bearish call on the leu. EUR/RON has risen after we went long Aug 30 around 4.24. We still target the record high 4.40 from June and expect this pair to creep upwards in the coming weeks. The 4.23 area represents the 50% retracement level of the big March-June rise, and is providing a strong base for the euro right now. Intermediate targets are retracement levels around 4.29, 4.31, and 4.33 from the June-August drop. We also take this opportunity to reiterate our bearish HUF call as well, with politics there also proving to be a big negative.
There was yet another failed bond auction today, as the Finance Ministry rejected all bids for RON300 mln 5-year paper offered. Officials continue to try and put a 7% ceiling on borrowing rates, but there are simply no takers in this risk-averse environment. As we wrote earlier this week, “The more auctions that fail now, the more trouble Romania will be in down the road. Indeed, one of the assumptions behind any debt sustainability framework centers around getting borrowing rates back to “normal” levels. We aren’t seeing that in the euro zone periphery, and neither are we seeing it in the weaker Eastern European credits.” Making matters worse, the unpopular government is undertaking a cabinet shuffle and Fin Min Vladescu will be replaced. He has been at the helm since the last cabinet shuffle in Dec 09. The government has undertaken austerity measures as required by the IMF, but is paying a political price in terms of low popularity. If the new Fin Min shows less commitment to austerity plans, then the IMF package will be at risk. It did just receive approval of its fifth review under the current program, but the 24-month Stand-By Arrangement expires in May 2011. There is no way Romania can stand without IMF aid, and so markets should watch closely for signals by the new Fin Min.
