Should you sell the Romanian leu as economic growth slows?

Romania is a member of the European Union with robust economic growth in 2022 (+4.8%), bigger than most prominent EU members. It was driven higher by a pick-up in investment and strong consumption.

But the moment has faded in the meantime.

Higher inflation than in most other European countries, slowing private demand, as well as a downturn in public consumption resulted in a lower-than-expected Q2 2023 GDP (+1.1%).

Industrial production deteriorated in the year’s first half, led by the energy and manufacturing sectors. Also, retail sales are flattening.

Finally, the construction sector is suffering, too, with residential and commercial leading the downturn in 2023 as credit became more restrictive.

How about the local currency, the Romanian leu?

A quick look at how the Romanian leu performed against the euro and the US dollar reveals severe weakness against both.

In 2016, EUR/RON broke higher. It traded back then at 4.45, followed by a strong bearish trend. Moreover, during the COVID-19 pandemic, it traded close to 5 – a pivotal level.

Romania suffered from higher inflation than other European countries, especially when compared with Euro area members. It translated into ongoing pressure against the pivotal level, where the market formed an ascending triangle.

The USD/RON chart looks somewhat similar. Since 2014, the market is bullish, as depicted by the rising trendline on the chart below. Moreover, the series of higher lows and higher highs is still in place, pointing to further upside.

Given the slowdown in economic growth that makes it difficult for the National Bank of Romania (Banca Nationala a Romaniei) to fight inflation as it would like, the path of least resistance for the RON is the downside.

EUR/RON traders should closely watch a daily close above the pivotal level. On such a move, 5.2 is the next logical target suggested by the ascending triangle. As for the USD/RON, the bias remains bullish while the market holds above the rising trendline.

Summing up, the Romanian leu looks poised for another leg lower, especially against the euro. Should we see a bullish breakout on the EUR/RON, expect the USD/RON to push higher, too.

The post Should you sell the Romanian leu as economic growth slows? appeared first on Invezz.