FX Market Outlook for 2024: What should Romanian SMEs expect from the local currency and forex market

In its 2024 Foreign Exchange Market Outlook released this week, iBanFirst, a leading global provider of foreign exchange and international payments for businesses, present in 10 European countries, provides Romanian companies, especially those doing international payments, with an overview of key trends for the upcoming year, helping them shape their currency risk management strategy for 2024.

How will forex market volatility impact Romanian companies in 2024?

In 2023, Romania’s top trading partners included EU countries from the Eurozone (Germany, Italy, France), CEE countries with their own local currencies (Poland, Hungary, Bulgaria) as well as China. Each of these countries has its distinct economic and monetary dynamics.

In 2024, as the currency volatility is expected to come back, even a minor fluctuation in exchange rates can have an impact on the profit margins of Romanian trade businesses, affecting their competitiveness in international markets. Therefore, it is vital for import-export companies to understand, anticipate, and protect against currency fluctuations, as they can substantially influence their financial performance during these challenging economic times.

“The currency markets are expected to return to volatile conditions in 2024. This is due to various factors, including the conflict in Ukraine, a potential major crisis in the Middle East, and uncertainty surrounding inflation. It’s important to mention that currency fluctuations aren’t a problem limited to large multinational corporations; they can impact businesses of all sizes, including local SMEs involved in cross-border trade. In light of this, business owners, CEOs, and CFOs should maintain a vigilant eye on the market-influencing factors and make well-informed decisions regarding risk management,” says Johan Gabriels, iBanFirst Regional Director for South-East Europe.

For Romanian SMEs doing international trade, currency market volatility can pose a number of challenges such as:

● Increased costs: Currency market volatility can make it more difficult for import and export companies to predict their costs.

● Reduced revenue: Revenue of import and export companies could register a decrease, leading to a loss of market share and a reduction in profits.

● Increased uncertainty: This can make it more difficult for companies to make investment decisions and plan for the future.

● Damage to reputation: Currency market volatility can make it difficult for companies to meet their contractual obligations and therefore see their reputation damaged.

Romanian companies doing import-export business can take a number of steps to mitigate the challenges of currency market volatility, such as:

● Monitor currency markets on a regular basis to stay informed of the latest trends. This will help local SMEs to identify potential risks and to take steps to mitigate those risks.

● Develop a currency risk management plan to identify and mitigate the risks of currency fluctuations. The plan should include a hedging strategy and other risk management tools.

● Use a currency management specialist to help them develop and implement a currency risk management plan.

Romanian Leu (RON) forecast for 2024

In 2024, iBanFirst expects the Romanian leu (RON) to slightly depreciate against the euro. The RON is likely to remain under pressure, as the war in Ukraine is weighing on the European economy. The evolution of the RON will also be influenced by the monetary policy of the Romanian National Bank (BNR) and other factors, such as the global economic conditions and the investment decisions of foreign investors.

Although the EUR/RON is on a clear upward trend, analysts predict that the pair will trade at below 5.00 in the first half of 2024. This is because the central bank’s tolerance for RON depreciation appears to be quite limited, especially given ongoing budgetary reforms that have the potential to slightly impact the inflation. iBanFirst further anticipates that the EUR/RON will gradually shift from 5.00 towards 5.02 lei per euro within the 12-month forecast.

“The Romanian leu is a relatively liquid currency. According to the Bank for International Settlements (BIS), the average daily turnover of the Romanian leu in the foreign exchange market was $9 billion in 2022. This places the Romanian leu among the top 20 most traded and most liquid currencies in the world,” says Alin Latu, Country Manager iBanFirst Romania.

EUR/USD pair forecast for 2024

Based on economic fundamentals, iBanFirst’s analysts appreciate the euro is still too expensive against the dollar and that the fair value is closer to around 1.03-1.05. Contrary to the market consensus, iBanFirst’s analysts doubt that the US dollar will depreciate significantly in 2024. The US economy is doing well and even if it is likely to slow down in 2024, there is no recession in sight. While many analysts predict a rate cut by the Fed during the first quarter of the year, they anticipate that the monetary policy pause will last longer than what is currently expected, keeping real interest rates at attractive levels in the US. Furthermore, the worsening global economic conditions are likely to bolster the strength of the dollar as it is seen as a safe-haven currency during times of uncertainty.

Key events that will influence the European currency markets in 2024

As we approach the end of 2023 and look ahead to 2024, despite the ongoing uncertainties in the global economy, there are still several indicators that can provide signals about the evolution of the forex market in the upcoming year.

● A new energy crisis especially if the geopolitical situation in the Middle East deteriorates further. At the moment, the scale of the crisis is not as severe as last year’s.

● The return of stagflation in Europe as recent data reveals weak economic growth and inflation rates higher than expected in Germany and France. The situation in the UK looks also concerning.

● High recession risk in the Eurozone determined by the delayed post-Covid economic rebound, the lasting energy crisis, and the overly restrictive monetary policy.

The full report is available here: https://shorturl.at/chR19.

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