The leu traded near record lows ahead of a Romanian central bank deposit tender on Monday which may tighten liquidity in markets but is unlikely to ease worries over new taxes levied this year. The leu traded at 4.7055 on Monday, near the all-time low of 4.7085 it hit in illiquid late trade on Friday.
It pierced the 4.7 level for the first time ever on Friday, which some market participants had believed the central bank would defend. Romanian assets have underperformed Central European peers since the government announced a month ago new levies on the banking and energy sectors.
The tax on bank assets has also caused uncertainty over monetary policy being linked to the level of inter-bank interest rates. "Risks that the central bank will opt to keep rates stable due to financial stability considerations increased therefore," Raiffeisen analyst Stephan Imre said in a note. "In this new setup, RON FX (the leu) will lack sufficient support from interest rates and could destabilise somewhat," he added.
A fast retreat in inflation in the past months across the region has eased pressure on the bank to increase its interest rates further. But its one-week deposit-taking auction on Monday "could signal central bank's stance against the current liquidity surplus backdrop", ING analysts said in a note.
"The 1M to 1Y (money market) curve became slightly inverted towards the end of Friday's trading session, reflecting banks' expectations for higher carry in the short term," they said. A new five-year benchmark bond offered at an auction by the government on Monday was unlikely to generate sufficient demand for the full amount of bonds offered, they added.
Elsewhere, the forint and the Czech crown eased 0.1 percent against the euro, but stayed near their strongest levels in several months. The forint surged last week after central bank Deputy Governor Marton Nagy said the bank could start to tighten policy if core inflation reached or exceeded 3 percent.
The crown is buoyed by expectations that the Czech central bank (CNB) will continue hiking interest rates. "Even though we expect the CZK to strengthen at the beginning of 2019, we doubt that the CNB's expectations will be met again," analyst Sebastian Petric said in the Raiffeisen note, adding that the bank could increase its base rate in February and also in March to fight inflation. Elsewhere, the dinar traded a touch firmer at its 90-day moving average, shrugging off street protests against Serbian President Aleksandar Vucic and persistent reports that he considers holding snap elections.
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