Romania is in a very unusual situation. The country is having the most stable exchange rate against the EUR this year compared with CEE peers, the lowest key rate at 3.75 % while running large twin deficits. This is likely to continue all this year, according to the most recent forecast by the award-winning fintech iBanFirst, one of Europe’s largest providers of foreign exchange and international payments. Expect the EUR/RON to remain stable about the key threshold of 4.95. There are several factors pushing risk aversion upside on the forex market : risk of global recession (due to the contraction in new export orders in the manufacturing sector in Germany and China), stagflation in Germany, the Ukraine war and its negative consequences on the commodity sector (both energy and foods), structural inflation (which is also the case in Romania), global trade disruptions and the zero Covid policy in China, for instance. In this context, investors are looking for safe havens – meaning the USD and to a lesser extent the EUR. Other currencies tend to depreciate against the USD (and the EUR), especially emerging currencies. Typically, the HUF dropped against the EUR over the past three months, by 6.2 % and 1.9 % respectively. This is what we normally expect in a period of higher geopolitical and economic risks. What is unusual is that the RON has remained rather stable against the EUR over the past few months. The Romanian currency has decreased by only 0.04 % YTD and by 0.01 % over the past three months, for instance. Basically, the cross EUR/RON is stable, no matter what happens. Yet, Romania is facing more or less the same challenges than its CEE counterparts. Inflation, measured as the Consumer Price Index, is skyrocketing at precisely 13.76 % in April YoY – with non-food prices (like clothes) jumping by 16.35 %. This is the highest increase since 2004. It will likely keep going up, in the short term. Romania fears that it will end up more vulnerable whatever happens in Ukraine too (which might increase defence spending, in the long run). Growth risks are tilted to the downside. iBanFirst’s 2022 GDP forecast is at 2 % and the fintech expects that Q1 GDP will only record a 0.2% quarterly expansion (the release is scheduled for 17 May). Finally, the country is facing structural economic issues (like the demographic downturn: low birth rate and emigration of well-educated youth). How do iBanFirst’s fx specialists explain the RON stability despite all these risks ? Basically, the National Bank of Romania (NBR) has done a fine job over the past few months. Several factors provide a helping hand : - The cautious monetary policy tightening. At the May meeting, the NBR raised the benchmark interest rate by 75 basis points (against expected 100 basis points) to 3.75 %. This was the sixth consecutive hike since October. But the central bank is less aggressive to tackle inflation than its central European peers. The country’s high twin deficits (budget and current account) limit how far it can raise rates. Expect real interest rates to be lower in Romania (see chart) than in most other CEE countries this year. The fintech’s year-end target is at 5.0 %. Paradoxically, it helps to some extent the RON. According to iBanFirst, a tight FX management is needed to contain CPI pressures. Romania is the CEE country where the FX-passthrough into inflation is the highest. A 1 % move in the FX causes a 0.2 % rise in CPI (versus only 0.08 % for Poland). - The liquidity context. In March, liquidity shortage reached roughly RON10bn. iBanFirst expects that the system will remain in short liquidity for the rest of the year, at least. This is a net positive for the RON. This should also push Romania’s 10-year government bond yield (the market benchmark) close to 10 % (against 7.9% as of today). FX-wise, iBanFirst’s consultants acknowledge the coming months will be more challenging for most emerging market currencies, including the RON. But given the NBR’s good track record, the EUR/RON is likely to remain stable around 4.95 going forward. In the worst case scenario (global recession or higher geopolitical risk due to Ukraine versus Russia or China versus Taiwan, for instance), the NBR will likely try to keep the FX rate stable through a combination of FX interventions (it has €46bn of foreign reserves – enough to step in in the market as much as necessary) and spiking carry rates. This will certainly be successful, in their view.