![The lira weakened 1.5 per cent to 3.4473 per US dollar as of 6.45pm on Thursday in Istanbul. It earlier touched a record ...](/content/dam/images/1/m/z/1/h/r/image.related.afrArticleLead.620x350.gsx6pu.png/1480025236628.jpg)
The Turkish central bank's unexpected overnight interest-rate increase provided only a fleeting respite for the nation's beleaguered currency, with the lira's knee-jerk advance dissipating within hours of the decision to boost borrowing costs.
Turkey's currency, which climbed as much as 0.8 per cent after the announcement, reversed gains amid speculation the central bank will hesitate to deliver further rate hikes to counter the impact of higher US interest rates. That pushed it to a fresh all-time low against the US currency.
The currency has weakened the most in emerging markets this quarter, slumping to successive record lows since Donald Trump's election victory stoked inflation expectations, driving US yields higher and diminishing the appeal of riskier assets. The median estimate of economists in Bloomberg survey was for no change as central bankers steer a course between political pressure from President Recep Tayyip Erdogan for low rates to revive a slowing economy and to mitigate against a tumbling currency.
"We expect the Turkish lira and, to a lesser extent, South African rand to weaken further against the (US) dollar owing to persistent political and balance of payments concerns," said David Rees, a senior economist at Capital Economics.
South Africa's Reserve Bank on Thursday left borrowing costs unchanged at 7 per cent for a fourth straight meeting. Moody's rates South Africa's foreign-currency debt at two levels above junk, with a negative outlook, and S&P; Global Ratings, which will publish its review on December 2, has the nation on the lowest investment-grade level, with a negative outlook.
In a morning note on EM currencies, Rees argued that he expected US Treasury yields and the greenback to climb further next year. "In that environment it is hard to see the Mexican peso staging much of a recovery against the dollar, especially with so much uncertainty hanging over future relations with the US. Close links to the ailing euro are likely to ensure that currencies in Central Europe struggle against the dollar too," Rees said.
Mexico's central bank last week raised borrowing costs for the fourth time this year after Donald Trump's election dragged the peso to never-before-seen levels of more than 20 per dollar, boosting the risk of faster inflation. Policy makers increased the key rate a half point to 5.25 per cent, the highest level since 2009.
Respite for EM commodity currencies
One bright spot on the horizon, according to Rees, is for EM commodity currencies which "should find some support from the increases in commodity prices that we forecast in 2017, including the Russian rouble and Brazilian real".
Iron ore and base metals including zinc and copper have surged recently amid bets that a Trump administration will boost infrastructure spending and therefore demand for raw materials in the US at the same time as China's economy appears to be stabilising.
Emerging market assets overall have had a tough time.
"The world appears to be divided into the US and the rest of the world from the currency point of view," said Simon Quijano-Evans a strategist at Legal & General Group in London. "The market is fully pricing in a Fed hike in December." The prospect of further US rate hikes through 2017 has risen.
Stocks in Indonesia paced declines in developing-nation equities on Thursday and Vietnam's dong weakened as the Philippine peso dropped to 50 per dollar for the first time in eight years.
The greenback traded near a decade high after US economic data showed rising orders for durable goods and improved consumer sentiment, adding to the case for tighter Fed policy. Trump's election pledges to boost infrastructure spending have fanned speculation rates will rise, potentially eroding the extra yield investors earn on riskier developing-nation assets.
Lira not yet on solid ground
In Turkey, the central bank slashed the overnight lending rate by as much as 250 basis points this year through October, even as inflation remained more than 200 basis points above the bank's target.
There was little in the central bank's statement "that suggested this was the beginning of a hiking cycle", Henrik Gullberg, a strategist at Nomura International in London, said in an emailed note. "At this stage the central bank was not able to pre-commit to further hikes 'if necessary' and therefore this remains more like wishful thinking."
The lira weakened 1.5 per cent to 3.4473 per US dollar as of 6.45pm on Thursday in Istanbul. It earlier touched a record 3.4494.
The central bank raised the overnight lending rate 25 basis points to 8.5 per cent, and boosted the one-week repurchase rate 50 basis points to 8 per cent. The central bank's decision defied pressure to reduce borrowing costs from the government, helping to dispel some investor concerns about the monetary authority's independence.
"It is positive in the sense that the central bank showed that they can move," said Erkin Isik, a strategist at Turk Ekonomi Bankasi in Istanbul. "However, it's yet to be seen whether 25 basis-point hike in the lending rate will be enough to reverse the earlier underperformance, which I think also depends on the global backdrop."
The reaction in Turkish bonds proved more resilient, with the yield on 10-year securities falling 14 basis points to 11.24 per cent. It closed at a record-high on Wednesday.
Bloomberg