Eye on the Romanian Leu

by: Roger Nusbaum

Here is a chart of the US dollar versus the Romanian leu:

Romania is a deficit country that relies on foreign investment. Really, it is at the mercy of foreign investment. In fact foreign investment is vital throughout the region. The only country nearby that might be in generally rougher shape is Latvia, but the lat, as it is known, has only weakened by about 1% compared to almost 10% for ron.

This article from MarketWatch gives a good recap of what is going on including some detail about a recent report from S&P that says Romania, Latvia, Iceland, Bulgaria, and Turkey are most vulnerable to adverse market conditions. The overnight rate in Romania is 7% and has been heading lower since February.

This may seem like an obscure market, and maybe it is, but (something I have touched on in the past) it is worth being somewhat in touch with substantial currency dislocations going on out there. It could be argued that the risk aversion correction of Q2 2006 started in Iceland, another relatively obscure country.

I am not saying you have to be an expert in these things but simply knowing a thing or two about Romania and having just read the headline of the MarketWatch article puts you in touch that something is going on and knowing a little bit of market history tells you that it could become market moving.

If you own any foreign countries you probably have one that like Romania is a higher yielding deficit country. If Romania dominoes to take down other countries, you might reasonably infer that the country you own has no fundamental link to Romania (assuming of course that it does not) and so if it does go down in sympathy selling it is probably not a good idea.

Giving this no thought might lead to a bad sale if this story does impact other markets.