LONDON: A mini revival in emerging market stocks continued on Tuesday, though focus was firmly on an interest rate decision in Turkey seen as a key test of the central bank's ability to resist government pressure.
MSCI's main 23-country EM index nudged up 0.3 percent as some last minute bargain hunting by investors following its 17 percent plunge this year, put it on course for a fifth rise in six days.
There was some respite for oil and commodity dependent markets like Russia and South Africa and their currencies, as crude clawed up from its lowest level in more than a decade and the dollar dipped.
The traditional pre-Christmas lull in trading was already taking hold but investors were gearing up for one of the last big EM events of the year; a meeting of Turkey's often unpredictable central bank.
The lira was down against the dollar at 2.9211 and stocks in Istanbul were 0.6 percent lower as both underperformed.
Last week a Reuters poll found 14 out of 16 economists expect it to hike the benchmark one-week repo rate, with most seeing a half-percentage point move from the current 7.5 percent.
They also expect a similar increase in the overnight borrowing rate. Because of the way the bank manages the system and the pressure it often gets from politicians to keep rates low, it could be that move that proves most telling.
"Even if they raise the one-week repo rate to 8 percent, the average cost of central bank funding for local banks is around 8.85 percent.. so it would be like raising rates without actually tightening," said Piotr Matys an economist at Rabobank.
"If they doesn't raise rates the market could be disappointed and the lira could weaken but if they do raise it could draw criticism from politicians. So whatever it does today, one way or the other it could backfire."
Elsewhere, Poland's zloty remained in fight back mode. It rose against both the euro and dollar as eastern European traders pared back bets a near complete change of decision-making personnel at the Polish central bank in the coming months would lead to a flurry of further rate cuts.
Kazakhstan's tenge bounced sharply after IMF data showed a jump in the country's gold reserves and the dust in the region began to settle after Azerbaijan's sudden devaluation of its currency, the menat, on Monday.
In Asia overnight, the Indonesian rupiah hit a one-month high versus the dollar, building on momentum gained after breaching key technical resistance levels earlier this week and after last week's U.S. Federal Reserve's interest rate hike.
Currencies such as the rupiah and the Malaysian ringgit are also probably being supported by 'short-covering', said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.
"However, I don't think these moves should be taken as an indication of how the market is likely to move from January onwards," Murata said, adding that there were still risks such as concerns about China's slowdown and low hanging oil prices.
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