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On close to record volumes, the RON followed the firming path it has been trailing for some time now and advanced to close Wednesday's session at 4.3250/EUR. Nevertheless, the volume-weighted average rate for the RON was around 4.3350/EUR and the RON appreciation was of only 0.3% on Wednesday. This seconded the 1% gain the local currency secured after the local debt was announced as eligible for a widely watched EM debt index. With one of the debt instruments announced as meeting criteria for index entry being auctioned today, we should see another session of strong foreign inflows driving RON firmer. However, we think the current bias of the central bank is to try to prevent any significant RON appreciation, while the recent RON gains have probably underpinned the natural commercial demand for hard currency. On these grounds, we see further RON advances as limited, possibly to 4.31/EUR today.
With cash still in the 5.5-6.5% range, the short end of the FX swap curve has moved upwards a bit, as 1M rates now trade around 5.5%. But as rates further along the curve have not followed through on the increase, this may also point to potential funding of the foreign inflows into local debt being channeled through the short end of the FX swap curve.
The risk rally on RON assets after the J.P. Morgan index inclusion announcement will most probably drive the yield at todays 5Y T-bond auction to a fresh historical low. We expect strong foreign demand to drive the maximum yield for the 5Y paper to around 5.40%, which is some 120bps lower than at the previous tender for this instrument a month ago, while MinFin will most probably sell significantly more than the RON0.5bn planned.
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