Political Stress Pushes Romanian Leu Lower vs Euro

The leu closed at 4.2590/2615 per euro versus 4.2400/2450 per euro on Thursday.

The leu opened at around 4.2420/2430 per euro and appreciated to an intraday high of 4.2385 per euro but a surge in euro demand made it lose ground and close at an intraday low of 4.2605, one dealer told SeeNews.

Romania's central bank, BNR, set its reference exchange rate at 4.2477 lei per euro on Friday, compared to 4.2347 on Thursday. For the U.S. dollar, the BNR set its reference exchange rate at 2.8774 lei versus Thursday’s 2.8737.

The dealer expects that the leu will not weaken beyond the 4.28-per-euro notch next week after it failed to defend the 4.25-per-euro resistance level this week, adding that the uncertain political environment in the country is putting pressure on the leu.

Romania's Constitutional Court earlier on Friday ordered an inspection of the invalid ballots cast in the run-off presidential elections last Sunday, trying to break a political deadlock that has stalled crucial reforms. The court ordered the recount in response to opposition Social Democrats' demands for cancelling the results of the run-off vote over alleged fraud and for repeating the elections.

Incumbent President Traian Basescu has won 50.33% of the vote, while the PSD leader Mircea Geoana has come close second with 49.66%, according to final official results.

The tug of war between Basescu and Geoana deepens the months-old political crisis that has stalled key reforms in the economy and justice system, on which hinges the release of the next installments of a 20-billion euro bailout package led by the International Monetary Fund (IMF).

"If the political uncertainty persists, it will likely have a negative impact on the exchange rate and interest rates," Raiffeisen Research said in its CEE weekly bond markets outlook. "Due to political turmoil, the budget plan for 2010 has not yet been approved. As a result, there is no chance that Romania will receive any money from the IMF this year."

"The Constitutional Court may not decide very quickly on whether to cancel presidential elections, which means political instability could persist with negative impact on the leu," ING Bank said in a daily note, adding that political stress remains the main risk for the leu.

Turnover on the interbank leu deposit market fell to 3.030 billion lei on Thursday from 3.104 billion lei on Wednesday. The BNR will issue Friday’s turnover figures on Monday.

Interest rates on overnight leu deposits rose to 10.35%/10.85% on Friday from 11.41%/11.92% on Thursday.