Romanian Leu Falls 1st Day in 3 Before Local Bond Sale Tomorrow

The leu weakened for the first time in three days ahead of the first local debt sale since three Romanian local bonds entered JPMorgan & Chase & Co.’s emerging-market bond index.

The leu pared the second-best advance this year among eastern European, Middle Eastern and African peers tracked by Bloomberg as JPMorgan said in a report yesterday extra demand for Romanian debt amid index inclusion will be limited. Investors have already boosted their holding of Romanian bonds by $3.5 billion through January, the U.S. bank said, citing Ministry of Finance data. The central bank scrapped a limit on the size of its weekly repurchase auctions on March 4, almost five months after imposing the cap, increasing money supply to commercial banks.

“Injecting unlimited liquidity is a sign of transparency and could accelerate the decline in short-term rates and yields,” Ana-Maria Morarescu, a Bucharest-based economist at Raiffeisen Bank Romania SA wrote in a note today. “Over the short-run this might bode well for the leu, but the limited downside potential of yields in the absence of a key rate cut could reduce non-residents’ appetite for Romanian bonds and weaken support for the leu.”

The leu depreciated as much as 0.2 percent and traded less than 0.1 percent weaker at 4.3576 per euro by 4:50 p.m. in Bucharest, cutting its gain this year to 2.1 percent, according to data compiled by Bloomberg.

The Banca Nationala a Romaniei lent 7.3 billion lei ($2.2 billion), matching the banks’ bids at its weekly currency sale earlier this week. The central bank, which has a managed-float policy for the currency, has restricted repurchase agreement operations since Oct. 8. The bank kept its key rate unchanged at a record low of 5.25 percent during its seventh monetary policy meeting on Feb. 5.

The Finance Ministry plans to raise 500 million lei in a sale of January 2016 bonds tomorrow. The debt on auction is among the three fixed-income securities included in the JPMorgan index from March 1. The country last issued 398 million lei in 2016 bonds on Feb. 14 at an average yield of 5.73 percent.