LONDON: The Turkish lira rallied to four-month highs on Thursday after a surprise policy tightening decision reassured investors about the central bank's resolve on inflation, while Mexico's peso rose after US comments on the NAFTA trade deal.
The lira strengthened 0.5 percent towards its firmest level since January after the central bank hiked the highest of its multiple interest rates on Wednesday in an attempt to rein in double-digit inflation.
Annual inflation soared to 11.29 percent last month, its highest in 8-1/2 years, as currency weakness stoked a surge in food and transport prices. The latest hike and liquidity measures are expected to raise the weighted average cost of funding by 25 basis points to 11.75 percent.
But it may also reassure investors that the central bank may be able to tackle inflation without government interference.
"The move was surprising in the sense as it came at a time of relative stability in the lira given that the central bank seems to generally respond to lira weakness," said Inan Demir, senior emerging market economist at Nomura.
"But it might still have a defensive element given that we will see next week the April inflation release ... and yesterday's hike may be aiming to preempt that inflation increase and preempt an erosion of real rates into negative territory." He predicted inflation would rise to 12 percent.
JPMorgan told clients the move had injected "a significant dose of confidence" which could spark a more durable rally in local currency assets, adding it was moving to an overweight position in lira and Turkish local bonds in its model portfolio.
Local 10-year sovereign bond yields fell to the lowest since November 2016 while five-year credit default swaps eased to 212 basis points, their tightest in 21 months.
The average yield spread paid by Turkish sovereign bonds over US Treasuries on the JPMorgan EMBI Global Diversified index also narrowed 1 basis point to 291 basis points, the lowest level since July 2016.
Mexico's peso, which had slumped 1.75 percent on Wednesday on reports that the United States was considering withdrawing from the North American Free Trade Agreement (NAFTA), rose one percent as President Donald Trump said he would not immediately scrap the pact.
A disruption in trade could wreak havoc in the auto sector and other industries, hitting profits at companies that have benefited from zero-level tariffs and Mexico's relatively low labour costs. Mexican trade figures for March are due out later on Thursday.
Emerging currencies were also supported more broadly by the lack of specifics in Trump's long-awaited US tax cut plan, which many fear will be difficult to achieve and which weighed on the dollar. Russia's rouble gained 0.3 percent.
Investors will be looking to an ECB interest rate decision later in the day and will scrutinise policymakers' comments for any clues on whether it will start to pare monetary stimulus in the coming months.
The rally in emerging market equities ran out of steam, with MSCI's benchmark emerging stocks index down 0.2 percent.
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