LONDON Jan 29 Turkey's lira posted its biggest
one-day gain in more than five years on Wednesday after huge
interest rate hikes, but the impact was already starting to
fade, while South Africa now also faces pressure to tighten
Turkish debt insurance costs slumped and its sovereign bond
yield premia to U.S. Treasuries fell 20 basis points.
But the biggest immediate impact was on the lira, which rose
more than 3 percent against the dollar after the central
bank jacked up all of its interest rates late on Tuesday.
The currency relief also pushed up Turkish lira bonds, with
10-year yields dropping almost 40 basis points, but
the lira eased off session highs of 2.16 per dollar to stand at
2.24 by 0921 GMT.
The central bank is trying to counter a massive lira selloff
caused by the prospect of a reduction in U.S. stimulus that is
sucking investor cash out of the most vulnerable emerging
economies, where real interest rates were deemed too low to
compensate for growing economic and political risks.
The hike follows similar moves across the developing world,
with India unexpectedly raising interest rates this week, and
Brazil and Indonesia already in policy-tightening mode.
But with the U.S. Federal Reserve expected to announce later
in the day plans to shave another $10 billion off monthly bond
buying, any emerging market rallies may be short-lived.
Ilan Solot, a strategist at Brown Brothers Harriman, said
the lira moves were down to investors covering short positions
against the dollar.
"The most a move like this can achieve is to bring emerging
markets back a high-beta type of status, (meaning) it will
perform in line with developed markets," Solot said.
"Before this, EM was underperforming. The idea, if this move
gets traction in the market, after moves by Brazil, India and
Turkey, you can take the edge off EM."
In Asia, currencies rallied with the Korean won posting its
biggest gains in 6-1/2 months, but rallies in most emerging
markets indeed faded. South Africa's rand gave up early gains to
ease 1 percent to the dollar.
The policy pressure has moved to South Africa, where
analysts expect interest rates to stay unchanged at 1300 GMT.
Swap markets however are pricing a roughly quarter point rate
hike, while 100 basis points in policy tightening is factored in
for the next six months, banks' data shows.
South African bond markets have seen heavy outflows in
recent sessions, with the benchmark yield having risen
30 bps since the start of this week.
"Although the (central bank) will be very reluctant to hike
rates in such a weak growth environment, failure to do so risks
South Africa getting left in the wake of other emerging markets
that have been hiking aggressively," analysts at Tradition said
in a note.
Others, however, point to South Africa's weak domestic
demand and lower inflation compared to Turkey or India and
reckon an interest rate rise is unlikely.
"The slowdown in Chinese demand and the fall in mining
output because of strikes have been at the root of export
weakness and the current account deficit. I am not sure (a rate
hike) will solve South Africa's external problems," said Claire
Dissaux, head of economics and strategy at Millennium Global.
But she added: "People have been focusing on the gap between
emerging and U.S. rates and that's not high enough in many
On equities, the main emerging index rose 1
percent off 4-1/2 month lows, with Turkish stocks up almost 2
percent on the currency relief. Greek stocks
outperformed in emerging Europe with a 3 percent rise ATG>.
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