LONDON Jan 31 Emerging markets steadied in holiday-thinned trade on Friday, with currencies such as the rouble and lira trading just off multi-year lows after dramatic central bank action to counter the biggest sell-off in years.
Many markets in Asia were closed for the lunar New Year holidays, cutting trade volumes. MSCI's benchmark equity index, of which China comprises a fifth, traded just off 4-1/2 month lows though stock markets in Russia and Turkey were almost 1 percent lower .
Battered emerging markets steadied late on Thursday in what many analysts said was a rebound from oversold levels, helped also by a 1 percent jump on Wall Street which had fallen four out of the five previous sessions.
The rouble which had rallied briefly after hitting near five-year lows to the dollar and record low to a euro-dollar basket, weakened again. But it stayed off the troughs, possibly supported by the central bank's plans for "unlimited interventions" should the rouble stray outside a target band.
Analysts said that had induced the closure of short rouble positions but reckon pressure will stay on the central bank as well as its peers elsewhere in emerging markets.
"It's calm today and liquidity is thin but the underlying fears are very much there. What's driving this is the fear of a Chinese slowdown and what I want to see is some kind of policy action from the People's bank of China," said Lars Christensen, chief emerging markets analyst at Danske Bank.
Weaker-than-expected Chinese factory numbers this week have confirmed the slowdown in the world's No. 2 economy, adding to jitters from the U.S. Federal Reserve which confirmed on Wednesday it would shave another $10 billion from its monthly money-printing.
India's central bank governor Raghuram Rajan has slammed what he called a breakdown in global monetary coordination, saying developed countries could not "wash their hands" of the turmoil caused in emerging economies by their actions.
Christensen said that in the absence of calming action from the PBOC, action from emerging central banks, interventions or policy tightening, was unlikely to be effective.
"Russia has indicated they will defend the rouble vigorously (but) my fear is a repeat of 2008 when they spent $200 billion to defend an artifical rouble peg," he added.
The Turkish lira firmed half a percent after a big rate rise from the central bank made it too expensive to run short positions on the currency for too long. The lira is up 3 percent this week, its biggest weekly gain since end-2011.
Options markets show that the currency sell-off may have further to run, with near-term implied volatility on the lira for instance lira spiking to five-year highs this week. Implied volatility, a gauge of how sharp price swings will be, have eased from the highs but remain elevated on a range of currencies.
Pressure is mounting on other emerging central banks to defend their currencies form excessive volatility, with Mexico likely to warn later on Friday that it is ready to raise interest rates if needed. The peso is trading just off 18-month lows.
The sell-off has not spared even relatively robust emerging economies such as Mexico, and data from Boston-based fund tracker EPFR Global, released to banks late on Thursday showed that $10 billion had fled emerging market funds in the week to Jan. 29..
On debt markets, domestic emerging bond yields have risen 30 basis points and sovereign dollar bond yields have risen 40 bps this week but were steady on Friday.
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