By Natsuko Waki and Walter Brandimarte
LONDON/RIO DE JANEIRO, Jan 28 Turkey's lira
extended gains on Tuesday on bets of an aggressive interest rate
hike, while other emerging market currencies and stocks rose on
growing expectations that more developing countries would
tighten monetary or fiscal policy.
Hopes for strong policy action in leading developing nations
brought relief to an emerging markets rout that gained traction
last week as investors, fearing less U.S. stimulus and weaker
Chinese growth, worried about a currency meltdown in Argentina
that revived memories of the country's 2002 financial crisis.
A sudden stampede of investors out of emerging markets could
hurt the economic prospects of developing countries, with
potential spillover into developed nations just as the U.S.
Federal Reserve prepares to cut back on monetary stimulus.
"There seems to be a concerted tightening trend underway in
the more fragile emerging market countries brought about by the
strong sell-off reality check," strategists with Brown Brothers
Harriman said in a research note.
"The question is, will this be enough to stop the bleeding?
We think it will help, but it is probably not enough."
After hitting a 4-1/2 month low on Monday, the MSCI emerging
equity index rose 0.4 percent, while the Latin
American portion of the index climbed 0.7
The lira gained about 0.9 percent to 2.26 per
dollar after slumping to a record low of 2.39 on Monday, as
investors bet Turkey's central bank will lift its benchmark
interest rate by 225 basis points to 10 percent at the end of an
emergency meeting later on Tuesday.
An aggressive rate hike would mark Turkey's return to more
orthodox monetary policies after unsuccessful attempts to
support the currency with forex auctions, liquidity adjustments
and verbal intervention. It would also likely put the central
bank at odds with Prime Minister Tayyip Erdogan, who has
publicly condemned rate increases.
India's rupee rose about 1 percent after its
central bank unexpectedly raised its benchmark interest rate by
25 basis points to counter inflation.
BRAZILIAN REAL STRUGGLES
Brazil's real was little changed after losing 3
percent of its value over the past six sessions as some traders
bet that rate hikes in Turkey and India would ease the pressure
on emerging markets in general.
Also supporting investor sentiment, central bank chief
Alexandre Tombini said in an interview with the Financial Times
that Brazil "would certainly adjust policy again if need be."
Brazil has already raised its benchmark Selic rate by 325
basis points to 10.5 percent since last April. While some
additional monetary tightening appears likely, policymakers are
running out of room to raise borrowing costs much higher without
badly damaging an already sluggish economy.
Hopes that Brazil will rein in public spending could also
support the real, which lost 13 percent of its value last year
as investors worried about a deterioration in the country's
In an attempt to differentiate Brazil from other fragile
emerging economies, Finance Minister Guido Mantega said the
government will soon announce budget cuts to ensure the
country's "fiscal soundness."
Mexico's peso rose 0.5 percent in a second straight
session of gains as policymakers tried to set the country apart
from weaker emerging markets by saying growth-enhancing reforms
will soon bear fruit.
In Argentina, however, the peso continued to slide on the
black market, dropping 0.8 percent to 12.25 per dollar.
That is a steep discount over the official exchange rate
, which remained around 8.0 per dollar for a third day
after last week posting its worst single-day loss since the
country's 2002 debt default and financial crisis.
"We don't think that the current stability can last for too
long," wrote irk Willer, emerging markets strategist with Citi,
regarding the Argentine peso's official exchange rate. "But it
will probably not matter too much for global markets outside of
the Brazilian real."
MORE MONETARY TIGHTENING?
South Africa and Indonesia - which with Brazil, India, and
Turkey have been dubbed the "Fragile Five" economies because of
their heavy dependence on foreign capital - may follow with
interest rate hikes, analysts said.
"The trigger for stability is emerging central bank action.
If Turkey does something, it will help," said Sebastien Barbe,
head of emerging market strategy at Credit Agricole in Paris.
"We expect the Turkish central bank to hike rates by 150-200
basis points. If they do that it will allow stabilization in the
lira, at least in the short term."
Like most analysts, however, Barbe does not expect any
action from South Africa when the central bank meets later this
week. The rand was up 0.3 percent at 11.03 per dollar,
off its five-year low hit on Monday.
New cash injections from China's central bank and a deal
from a trust firm that averted a possible default for a
wealth-management product also helped stabilize China, to which
many emerging economies are geared.
"The 'managed default' successfully staves off a potentially
disruptive default during the Chinese New Year period and the
hope is that it limits any systemic ripple effects," Deutsche
Bank said in a note to clients.
In the long term, however, investors are concerned about the
effects of China's economic slowdown and the Federal Reserve's
plan to scale back its monetary stimulus. The Fed is expected to
announce a further $10 billion cut in its bond buying at its
meeting this week.
Key Latin American stock indexes and currencies at 1730 GMT
Stock indexes daily % YTD % change
MSCI LatAm 2,920.84 0.64 -9.33
Brazil Bovespa 48,042.24 0.72 -6.73
Mexico IPC 40,960.75 0.24 -4.13
Chile IPSA 3,501.46 -0.55 -5.35
Chile IGPA 17,413.88 -0.46 -4.46
Argentina MerVal 5,597.16 -0.14 3.82
Colombia IGBC 12,042.81 0.04 -7.87
Peru IGRA 15,746.69 -0.25 -0.04
Venezuela IBC 2,817.01 -0.16 2.94
Currencies daily % YTD % change
Brazil real 2.4245 -0.02 -2.79
Mexico peso 13.2970 0.53 -2.01
Chile peso 545.7000 0.88 -3.59
Colombia peso 2000.0000 0.44 -3.40
Peru sol 2.8230 -0.04 -1.06
Argentina peso 8.0175 -0.16 -19.02
Argentina peso 12.3000 -1.22 -18.70