Romania’s leu strengthened to the highest level in a week on bets the central bank may step in to curb a currency decline.
The leu had weakened 0.4 percent this month as the central bank lifted a limit on the size of its weekly repurchase agreement auctions. The bank, which has a managed floating policy for the currency, has been capping the repo amount in the past four months to help shore up the currency. Inflation quickened to 6 percent in January, beating the 5.4 percent median estimate of 15 economists surveyed by Bloomberg.
“We are not anticipating that the central bank will tolerate continued weakness, particularly because they are serious about inflation targeting,” Roderick Ngotho, a London- based strategist at Royal Bank of Scotland Group Plc, wrote in a note. “A weakening currency is counterproductive in an environment where the central bank would like to cut the policy rate further. We favor leu upside this week.”
The leu appreciated 0.4 percent to 4.3832 per euro by 1:40 p.m. in Bucharest, the highest on a closing basis since Feb. 5, according to data compiled by Bloomberg and erasing this month’s loss.
The Banca Nationala a Romaniei increased the limit to 11 billion lei ($3.3 billion) on Feb. 11, from 10 billion lei a week earlier, as commercial banks’ demand for the leu reached 33 billion lei. The bank started capping the repo amount on Oct. 8 and cut supply to as low as 4 billion lei.
“The central bank “appears to be waiting for inflation to dip into the top-end of the 1.5-3.5 percent inflation channel so that they can ease the monetary policy rate further,” Ngotho said in the statement.
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