Leu Hits Year-High on Index as Central Bank Calls ‘Fair Value’

The leu reached its highest level in a year, prompting the central bank to say the currency is trading near “fair value,” after Romania became eligible for JPMorgan Chase & Co.’s emerging-market government bond index.

The currency advanced 0.3 percent to 4.3285 per euro by 5:35 p.m. in Bucharest, after adding as much as 0.4 percent to the highest intraday level since Jan. 30 last year. The yield on Romania’s June 2019 euro-denominated bonds slid 10 basis points, or 0.1 percentage point, to 3.693 percent.

The leu jumped 1 percent yesterday, the most in five months, after JPMorgan said Romania’s domestic bonds would be added to its GBI-EM Index series from March 1, spurring expectations of orders from fund managers seeking to replicate the benchmark gauge. Central Bank Deputy Governor Cristian Popa said today the currency is “not distant from fair value.”

“Since yesterday’s announcement was made after the home market closed, the central bank had no chance to react to the rapid appreciation,” Dan Bucsa, a London-based economist at UniCredit SpA, wrote in a note earlier today.

Inclusion in the index would be phased over a three-month period ending May 1, JPMorgan said in a note to clients yesterday. Romania’s weighting on completion is estimated at 0.54 percent of the GBI-EM Global Diversified index. Its entry is “subject to final determination,” JPMorgan said.

Romania’s October 2015, January 2016 and July 2017 bonds currently meet the criteria for index entry as they demonstrate the highest degree of liquidity, according to JPMorgan. This list is subject to change as market conditions may alter between now and the initial inclusion date.

Repo Auctions

The central bank, which has restricted its supply of leu at its weekly repurchase auctions since October to help prop up the currency, increased the limit to 6 billion lei ($1.8 billion) on Jan. 14 from 4 billion lei a week earlier.

While the central bank is unlikely to “hint at any desired euro/leu level nor to strongly intervene to force the leu to depreciate significantly,” it prefers a more stable currency closer to 4.4 per euro, Bucsa said.

“We are not distant from fair value of the leu at this point of time,” Central Bank Deputy Governor Cristian Popa said today at the sidelines of a Euromoney conference in Vienna. The central bank looks at the pace of the leu move to see whether it’s supported by a change in fundamentals, he said.

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