Stay informed with free updates
Simply sign up to the Currencies myFT Digest — delivered directly to your inbox.
After decades of relative dullness, FX seems to be getting fun again. The latest drama is happening in the Romanian leu, which has broken free of the central bank’s grip and tumbled past the 5-per-euro mark for the first time ever.
The proximate cause is worries over a pretty explosive political situation. The Maga-friendly, far-right nationalist George Simion now looks likely to become president after a run-off election on May 18, defeating a pro-Nato, pro-EU centrist Nicușor Dan.
The Romanian leu has been slowly weakening for almost two decades, but the central bank has through various interventions managed to keep it from weakening past 5 leu per euro for the past few years.
It willingness and/or ability to do so seems to have evaporated this week, with the leu suddenly falling to 5.09 on Tuesday. At pixel time it is at 5.124, and falling.
JPMorgan’s analysts yesterday wrote that the move has been driven by a mix of hedging and outright speculation that the Romanian central bank will have to abandon the leu’s managed-float regime and let it sail where the wind takes it.
We believe moves in FX implied yields yesterday [May 6] primarily reflected demand/supply and frictions in liquidity provision to offshore market participants. Specifically, we believe the market likely had to absorb: 1) FX-hedges being added for long ROMGB positions; 2) funding being raised via short-dated FX swaps for long EURRON spot positions; 3) speculative positions being taken via FX forwards on the view of further RON depreciation. In fast moves, onshore-offshore frictions can lead to RON FX implied yields exceeding the upper end of the interest rate corridor (7.5%)
JPMorgan’s report argues that the National Bank of Romania hasn’t exited the market entirely, and is mostly letting the leu fall to conserve its firepower.
However, they reckon that the central bank will allow a “decent adjustment” given a “likely permanent shift in fundamentals”. JPMorgan has therefore slapped a 5.25 target for the euro-leu exchange rate, but warned that the NBR could around that point step in and squeeze the shorts.
We postulate that NBR intervention played a less important role so far, although undoubtedly contributed to higher FX implied yields. NBR has allowed EURRON to trade higher, which has likely reduced the intervention amounts it had to supply. Nevertheless, the move remains managed and hence NBR is likely selling EURRON and withdrawing liquidity. From a starting point of RON 33.8bn surplus as of March 2025, it is unlikely that liquidity moved into a deficit already. The limited move so far in T/N implied yields, which remain below the upper-end of the interest corridor (7.5%), support this interpretation.
As EURRON adjusts higher, FX implied curve re-steepening is likely, with the upper-end of the interest corridor becoming a more effective anchor, though liquidity frictions/elevated FX demand can persist in the coming days. With the substantial shift in EURRON intervention policy surprising the market, FX spec/hedging demand can persist with continued offshore/onshore frictions. However, assuming we are right that NBR now allows a decent adjustment in EURRON spot, the forwards curve should trade less like a ‘devaluation’ pricing as the adjustment happens while the FX market demand/supply starts to normalize. Assuming no change in NBR policy rates/interest rate corridor, as we likely shift to a liquidity deficit, the upper end of the interest corridor (7.50%) should become a more effective anchor.
We do not expect NBR to outright squeeze offshore liquidity with outsized moves in FX implied yields, but policy remains opaque. History has seen occasions of very outsized moves in RON implied yields such as during the GFC, understood to have been engineered by NBR restricting availability of offshore RON to support FX. We believe such moves are less likely now. First, NBR likely judges some RON adjustment as optimal given the likely permanent shift in fundamentals. Second, the previous experience with such high FX implied yields proved very growth negative. However, there remains limited visibility on NBR’s FX policy reaction function/end-goal and we cannot fully exclude some squeeze on funding. We would argue though that this becomes more probable after a decent adjustment in EURRON first.
Hedge funds attacking pegs and managed-floats! It’s like the 1990s are coming back.