| LONDON, April 27
LONDON, April 27 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 U.S. 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
The average yield spread paid by Turkish sovereign bonds
over U.S. 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
Emerging currencies were also supported more broadly by the
lack of specifics in Trump's long-awaited U.S. 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
For GRAPHIC on emerging market FX performance 2017, see tmsnrt.rs/2e7eoml
For GRAPHIC on MSCI emerging index performance 2017, see tmsnrt.rs/2dZbdP5
For CENTRAL EUROPE market report, see
For TURKISH market report, see
For RUSSIAN market report, see)
(Additional reporting by Karin Strohecker; Editing by Catherine