Few weeks ago I was looking at the EURRON to touch 4.2 by the end of March. Of course this is still possible but there is something else I want to mention.
My longer term view for the RON is still for a weak currency as presented here and here but short term I looked at two things.
-regional currencies appreciated against the majors in line with global equity markets going higher.
-I expected some interest for the Romanian debt from foreigners which should have helped the RON stronger.
Where did I go wrong so far? In my assumption that foreigners would buy most of the government debt. In fact it looks like this has been bought mostly by the local banks. In other words, although I am perceived as a pessimist regarding the Romanian economy the reality is much grimmer than I perceived it. And the foreign fixed income market players seem to point to the correct call as the government is getting ready to announce entering recession one more time.
Where to from here? NBR has resources to keep the RON stable. But unless it sterilizes its interventions the price of money in the interbank market will go up increasing the cost of funding for the Ministry of Finance. The best strategy for NBR is to control a depreciation for the RON towards 4.4 in the first instance and 4.5 afterwards. Otherwise the money market will be faced with a liquidity trap and not the one that some macroeconomists fantasize about but a real a one where liquidity is scarce and expensive.