BUDAPEST: The leu neared record lows on Monday despite expectations for robust output data from Romania, depressed by uncertainty over a likely government spending spree.
Loose fiscal policy including steep wage hikes have already boosted Romania's inflation to a four-year high of 2.6 percent in October and led to an upwards revision in the Romanian central bank's (NBR) inflation forecast last week.
The bank also signalled that in the future its monetary policy will focus on keeping market interest rates near its benchmark rate, and it would be more flexible on the exchange rate.
Its comments pushed the leu through the 4.6 line against the euro, which market participants had believed was defended by the NBR in the past.
On Monday the leu eased 0.1 percent against the euro, to trade at 4.6533 at 0938 GMT, near to record lows set at 4.655 on Friday and again touched early on Monday.
Romanian government bond yields, which rose to multi-year highs on Friday, were mixed. The 10-year bond traded at a yield of 4.44 percent on Monday, up one basis point, one trader said.
"There are no reasons for the leu to firm going forward," said another dealer, based in Bucharest, adding that concerns over a rise in the budget deficit would maintain the pressure on the currency.
A controversial tax overhaul plan has also weighed on the leu.
The main Central European economies are due to release to third-quarter economic output figures on Tuesday.
Romania is expected to report the strongest annual growth rate in the region, about 6.5 percent, but going forward a strong rise in wages is likely to lose steam, Erste analysts said in a note.
The median forecast of analysts in a Reuters poll was 5.8 percent for Romania's growth.
Given uncertainties over fiscal policy, government spending late this year and the NBR's response, Romanian assets will remain fragile, market participants said.
"Whereas we would not exclude additional short-term setbacks for the leu..., a fast depreciation towards EUR/RON 4.70 would increase pressure for policy makers to react," Raiffeisen analyst Gunter Deuber said in a note.
The prospect of strong output data did not help Poland's zloty either, which eased 0.2 percent to 4.2358,
sticking to the past month's typical levels.
Detailed October inflation figures due from Poland at 1300 GMT could show that core inflation stays low and may even fall a tad to 0.9 percent year-on-year, the Raiffeisen note said.
That could supply the Polish central bank's doves with important arguments, the note added.
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