EMERGING MARKETS-Turkish rally fades, rand slumps despite rate hike

Wed Jan 29, 2014 9:57am EST

By Walter Brandimarte and Sujata Rao
    RIO DE JANEIRO/LONDON, Jan 29 (Reuters) - Emerging market
currencies slumped on Wednesday even after Turkey and South
Africa aggressively raised interest rates to stop capital
flight, as investors braced for an expected decision by the U.S.
Federal Reserve to cut back on stimulus.
    Markets from Istanbul to Sao Paulo remained under stress,
with the Turkish lira staging a short-lived rally that set the
tone for other emerging market currencies. Turkey's
stronger-than-expected monetary tightening put pressure on the
most fragile developing countries to follow suit in hopes of
preventing jittery investors from running for the exits.
    "Emerging markets in general will have to offer
significantly higher funding costs in order to stabilize the
dramatic change we are now seeing in net portfolio flows in the
asset class," Citi FX strategist Ishitaa Sharma said in a note.
    The South African rand sank over 2 percent to 11.24
per dollar even after the country's central bank raised interest
rates for the first time in almost six years, bringing its
benchmark rate to 5.5 percent from 5.0 percent. 
    In Turkey, where the central bank raised all of its interest
rates in a dramatic fashion, the lira initially rallied
more than 3 percent but eventually gave up gains and traded
about 1 percent weaker as investors began to wonder what else
policymakers could do to quell the turmoil. 
    "The Turkish rate move was more aggressive than many people
had expected. That was the good part of the story," said Ulrich
Leuchtmann, head of currency research at Commerzbank in
Frankfurt.
    "But the market had to force this activity. There is still a
fear in the market that the central bank does not have a
reaction function."
    Turkey's central bank move follows a massive lira sell-off
caused by the prospect of a reduction in U.S. stimulus that has
sucked investor cash out of the most vulnerable emerging
economies. Investors deem real interest rates in these markets
too low to compensate for growing economic and political risks.
    Turkish Finance Minister Mehmet Simsek addressed one of
those concerns on Wednesday, saying that economic growth will
not be severely damaged by the rate hikes and that it is too
early to adjust the government's forecast of 4 percent growth
this year. 
    The rate increase follows similar moves across the
developing world, with India unexpectedly raising rates this
week and Brazil and Indonesia already in policy-tightening mode.
    But Malaysia's central bank left rates unchanged on
Wednesday, taking the ringgit to the day's lows. And with
the U.S. Federal Reserve expected to announce plans later on
Wednesday to shave another $10 billion off its monthly bond
buying, emerging markets remained fragile.
    Latin American currencies posted large losses, with the
Brazilian real and the Mexican peso declining
nearly 1 percent ahead of the Fed announcement. 
    Emerging market stocks were also volatile. The main emerging
index rose 0.1 percent off 4-1/2 month lows, but the
Latin American portion of the index slid more
than 1 percent.
    
    Key Latin America stock index and currency prices at 1355
GMT
     Stock indexes               daily %   YTD %
                        Latest   change    change
 MSCI LatAm          2,868.05    -1.28     -9.23
                                           
 Brazil Bovespa      47,365.70   -0.99     -8.04
                                           
 Chile IPSA          3,470.64    -0.47     -6.18
                                           
 Chile IGPA          17,287.81   -0.36     -5.15
                                           
 Colombia IGBC       11,986.36   0.00      -8.30
                                           
 Venezuela IBC       2,817.01    0         2.94
                                           
                                           
 Currencies                      daily %   YTD %
                                 change    change
                     Latest                
 Brazil real         2.4445      -0.77     -3.59
                                           
 Mexico peso         13.3830     -0.93     -2.64
                                           
 Chile peso          549.5000    -0.69     -4.26
                                           
 Colombia peso       2016.2000   -0.68     -4.18
                                           
 Peru sol            2.8220      0.00      -1.03
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