The recent EUR/RON move above 4.95 shows us that the NBR stance is becoming more relaxed, but we still think it is too early for a significant move higher. Inflation remains the number one concern for the central bank and although the current account deficit looks problematic, its resolution may still wait a little longer.
EUR/RON touched 4.98 in May, which seems like a new line in the sand for now. Considering the record level of excess liquidity in the market, we think that the situation cannot suit the central bank. Seen from this angle, allowing the EUR/RON to shift higher might be an attempt to stimulate upside market pressure and get some of the excess liquidity out of the system.
The new temporary range is likely to be 4.94-4.98, with no expectation of moves to the lower levels we saw in the first quarter of this year, supported by significant demand for ROMGBs. We envisage at least one more upward shift before the year-end, most likely once inflation converges towards the key rate.
We target the EUR/RON level of 5.02 for the end of the year. We see larger moves as incompatible with the inflation target and beyond the central bank's pain threshold. From a market perspective it is a hard playing field.
The central bank's liquidity data shows that after allowing a move above 4.95 EUR/RON, the NBR seems rather tolerant of the situation, as liquidity hasn’t diminished much in May versus April.
If the central bank decides to tighten conditions significantly, we see a case for higher FX implied yields once again.
The combination of high yields, by far the best funding situation, a positive macro picture, not inverted ROMGBs curve and the inflation profile will, in our view, ensure market favour in 2H23.
According to our calculations, MinFin has secured about 63% of issuance. Although the risk of adjustments to the funding plan due to fiscal slippage or EU funds delays is high, the additional issuance would not change the picture and the market would easily absorb it with scope for additional FX issuance.
On the other hand, spreads against CEE peers and heavy long positioning may indicate a problem for the next rally. So, the overall direction of travel remains clear, further gains may be of a slower pace. In the hard currency space, ROMANI credit has performed robustly this year, with spreads modestly tighter YTD in absolute terms and relative to the BBB peer group.
Given the overall stable macrooutlook and limited political risks, in our view Romania remains a decent option for relatively high-quality carry (spreads are still the widest in the rating peer group for both USD and EUR paper).
However, with positioning relatively heavy and a likely lack of further positive catalysts, we would see limited scope for significant spread tightening in the near term. Headlines around EU fund delays could be a potential negative catalyst for investors to take profit or reduce positions.
