LONDON: Turkey's lira suffered another fall on Thursday, more than wiping out the gains made in the wake of Wednesday's emergency rate hike, while wider emerging markets booked cautious gains thanks to a lacklustre dollar and retreating US Treasury yields.
Turkey's central bank cranked up its top interest rate by 300 basis points (bps) to 16.5 percent on Wednesday evening, in an attempt to put a floor under the plunging currency and calm investors unnerved by repeated interventions from President Tayyip Erdogan.
Closing 2 percent stronger on Wednesday, the lira initially firmed in early trading but subsequently fell more than 2 percent as investors fretted over Erdogan's latest comments that Turkey would take "different measures" to tackle its double-digit inflation and current account deficit after next month's elections.
Wednesday's hike was widely seen as policy makers having done the necessary minimum, though more was needed to move ahead of the curve. But analysts said the initial signs were not encouraging after the central bank removed a reference in its statement to the willingness to tighten further.
"That kind of says 'here is 300 bps as you wanted, and we are done', and that was some kind of compromise with Erdogan," Tim Ash, a strategist at BlueBay Asset Management, wrote in a note to clients.
Analysts at Goldman Sachs also said the size of the hike only compensated for the additional inflation that would feed through from the lira's depreciation since the last rate-setting meeting on April 25.
There was also disappointment that the bank did not carry out the promised simplification of its interest rate regime.
However, the hike did seem to help stabilise other beaten down Turkish assets. Sovereign dollar bonds rose by as much as 3.3 cents across the curve, with the biggest gains at the long end.
Turkish five-year credit default swaps fell to a one-week low and local 10-year benchmark bond yields fell to 14.01 percent. Stocks rose 1.5 percent.
Emerging currencies elsewhere struggled for direction, despite US bond yields retreating following seemingly dovish minutes from the US Federal Reserve, and the dollar index falling by 0.3 percent.
The South African rand strengthened 0.3 percent with investors expecting the central bank to strike a hawkish tone at a rate-setting meeting later in the day, though analysts expected the bank would keep rates on hold at 6.5 percent.
However, data out on Wednesday showed local consumer price inflation jumped in April.
Meanwhile Russia's rouble and Mexico's peso booked slight losses.
Across equity markets, MSCI's benchmark emerging stocks index rose 0.5 percent, helped by a strong open in emerging Europe following losses in the previous session.
Polish stocks rebounded 1.3 percent, Hungary 1 percent and Russia 0.8 percent.
This followed a more mixed performance in Asian markets, where Chinese mainland stocks fell 0.7 percent to two-week lows and South Korea shares fell 0.2 percent after the US launched a probe into auto part imports.
Investors fear this may lead to new tariffs similar to those imposed on imported steel and aluminium. China and South Korea said they would monitor the situation.
US President Donald Trump also called for a different structure in any trade deal with China, fuelling uncertainty over the negotiations.
However, Indonesian assets continued to recover after a recent sell-off, with stocks up 2.6 percent and the rupiah up 0.3 percent after the new central bank governor confirmed the bank's commitment to stabilizing the currency.
Across emerging Europe, the Czech crown and Hungarian forint slipped 0.2 percent against the euro, with the latter trading near 23-month lows hit in the previous session.
On Wednesday the Czech central bank governor said they might raise interest rates faster if the crown strengthened more slowly than the central bank expects.
The Polish zloty outperformed its peers, firming 0.2 percent to trade near 4-1/2 month highs after a rate setter was quoted saying the balance in the central bank was shifting towards the hawks.
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