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Investing.com -- Romanian leu experienced its steepest one-week decline since 2009, attributed to the strong lead of far-right presidential candidate George Simion and the recent disintegration of the nation’s coalition government.
Capital Economics highlighted that the leu is still overvalued by approximately 15%, based on Romania’s economic fundamentals, indicating potential for further depreciation.
Last week, the leu fell by 3% against the euro, reaching a rate of 5.12/€. The central bank of Romania has been actively involved in the foreign exchange market to control the leu’s depreciation. This intervention followed heightened capital outflows triggered by Simion’s victory in the first round of the presidential election, which exacerbated the political crisis and led to the government’s collapse after the Social Democrat party withdrew from the coalition.
The future trajectory of the leu remains uncertain. It is not yet clear whether the recent depreciation represents a singular adjustment within the central bank’s strict exchange rate management, the beginning of several such adjustments over the upcoming year, or a shift towards greater exchange rate flexibility. The outcome of the second-round vote on May 18th may be a determining factor, as a win for Simion could result in increased capital flight.
Capital Economics posits that the central bank might need to adopt a more controlled exchange rate flexibility if Simion secures victory. As of March, Romania’s foreign exchange reserves stood at €62 billion, providing about five months’ worth of import coverage. Although these reserves are substantial, the central bank’s capacity to defend the leu is not infinite, especially if capital outflows continue.
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