The new ROL (RON) has come out stronger after its first day of trading on the forex market: the rate against the euro fell to 3.59 RON (35,986 ROL).
This is the sixth time this year that the euro has fallen below 3.6 RON - previous slides were seen during the time of high volatility on the market in February and early March. Since then and up until yesterday, however, market fluctuations remained frozen within the narrow band of 3.60-3.65 RON to the euro, in defiance of National Bank of Romania (NBR) statements since November 2004 predicting heavier fluctuations in exchange rates due to the central bank''s lack of involvement.
Despite public statements from NBR officials, the market saw the exchange rate stability of the last few months as an effect of the bank''s interventions on the market in defence of the 36,000 ROL (3.6 RON) threshold. The suspected interventions have also shown in the constant increase of the NBR''s foreign currency reserves by nearly two billion euros in five months.
As a result, after the panic caused by the heavy fluctuations from 38,500 ROL to 35,800 ROL/EUR at the beginning of the year and, previously, a level of undisturbed peace set in on the market. Customers soon forgot about the foreign currency risks and the need for caution, causing foreign currency lending to soar by an annual rate in excess of 60%, while imports skyrocketed pushing the current account deficit up by more than 70% compared with 2004.
Signs of mounting pressure emerged last week when the market was kept in check by fears of sustained intervention by the National Bank.
"We were expecting the euro to go down below 36,000 ROL this month, considering the seasonal trend of the market in which July is the month with the largest foreign exchange inflows which puts the most pressure on the ROL to grow," explained Radu Craciun, ABN Amro Romania chief analyst. At the same time he said it was too soon to jump to conclusions: "I wouldn''t be surprised if the NBR changed its mind and pushed the exchange rate back up."
The market is now expected to test NBR willingness to let the exchange rate slip still further. The result will mainly depend on the NBR''s somewhat conflicting priorities: the fight against inflation, in which it needs the ROL to strengthen to compensate for the effects of chain increases in controlled prices; the construction of a truly free and mature forex market; and, last but not least, the reduction of growth pressures on the current account deficit.
The market situation over the last few months shows that the NBR no longer sees a high level of volatility in exchange rates as necessary in discouraging the movement of speculative capital.
"The high likelihood of an initial capital outflow scenario has reduced significantly, meaning the likelihood of ROL depreciation in the fourth quarter, with all the inflation-related pressures, has lost a lot of its consistency. As a result, this year stands big chances of ending in a balanced manner, at least as a result of the six month ''shield'' when safeguarding measures can be adopted," said financial analyst Florian Lobocor. He believes the RON''s potential has not eroded. On the other hand, however, the rate of appreciation could be perceived as slower due to the redenomination.
razvan.voican@zf.ro
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