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The Turkish lira hit record lows against the dollar on Monday as expectations of faster tightening by the US Federal Reserve added to domestic economic and political pressures emerging market (EM) equities in general slipped 0.4 percent.
The lira was down more than 2 percent to 3.72 to the dollar after Friday’s data showed US wages rose in December prompting US rate hike expectations.
“The lira has always been one of the most exposed EM currencies to any sign that monetary policy in the US will tighten because of its large external financing requirement,” said William Jackson, senior emerging markets economist at Capital Economics.
“(Turkish) domestic policymaking is playing a role too as it seems the central bank is responding to political pressure not to raise interest rates, so it is likely to be behind the curve in reacting to pressure in the currency,” he added.
The lira lost 3.2 percent last week, pounded by higher-than-expected inflation and security fears after a series of gun and bomb attacks. The economy has remained sluggish, with a smaller-than-expected rise in industrial production in November, whilst Moody’s has warned that bank profits will be hit by increased non-performing loans.
Turkish five-year credit default swaps rose 3 basis points (bps) from Friday’s close to 273 bps, whilst the yield premium paid by Turkish sovereign bonds over US Treasuries on the JPMorgan EMBI Global Diversified widened out 9 bps to 359 bps.
The stronger dollar and expectations of faster Fed tightening also created headwinds for other vulnerable emerging market currencies and contributed to more subdued investor appetite for riskier assets, with the benchmark emerging stocks index down 0.4 percent. The yield premium on the JPMorgan EMBI Global Diversified also widened out 3 bps to 327 bps.
The Mexican peso, which remains vulnerable to any restrictions on trade, weakened 0.23 percent. It was still trading above record lows hit last week, which had prompted the Mexican central bank to intervene.
China’s onshore yuan slipped 0.24 percent and the offshore yuan gave back some of the sharp gains it made last week. But borrowing costs retreated from record highs, with overnight yuan deposit rates falling to around 10 percent from Friday’s high of 87 percent. In recent weeks the Chinese authorities have intervened in both onshore and offshore currency markets by selling dollars aggressively to prevent the yuan from depreciating too quickly.
The Russian rouble weakened 0.6 percent versus the dollar and Moscow dollar-denominated stocks retreated 0.8 percent with oil prices falling 1.7 percent to around $56 a barrel. The South African rand slipped 0.3 percent against the dollar. Over the weekend the chances of President Jacob Zuma’s ex-wife becoming the next leader of the ruling ANC party were given a boost with an endorsement from the party’s women’s division. Zuma also called for an end to ANC infighting.
The Polish zloty weakened 0.4 percent against the euro. The central bank is seen keeping interest rates on hold at a record low of 1.5 percent at its rate setting meeting on Wednesday.
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