LONDON (Jan 13): The Turkish lira fell 1.5% on Friday and was set for its biggest weekly fall since May, as weak Chinese export data dampened appetite for emerging stocks in Asian manufacturing economies.
The lira has been pounded by concerns about Turkey's political reforms, its sluggish economy, rising inflation and militant attacks, with investors unconvinced the central bank will take the necessary steps to shore up the currency.
On Friday the central bank decided not to open a one-week repo auction for a second consecutive day, in an attempt to tighten lira liquidity and bolster the currency. This forced banks to resort to its overnight lending rate of 8.5% interest or its late liquidity window at 10%.
However, the lira was still set to end the week down 4.7% against the dollar — on track for its biggest weekly fall in eight months. It has lost almost a quarter of its value since the failed coup attempt in July 2016.
"The market continues to look for one principal message — that the central bank is independent. That really is the one message the market needs now," said Simon Quijano-Evans at Legal & General Investment Management.
The bank is under political pressure not to raise rates, with President Tayyip Erdogan preoccupied by slowing economic growth and eager for lower borrowing costs to spur investment. Turkish economic growth was around 3% last year.
Other emerging currencies also struggled to make headway, with investor sentiment soured by poor Chinese trade data which showed 2016 exports falling for a second year, posting their worst drop since 2009. China's December exports fell by a more-than-expected 6.1% year-on-year.
"Chinese trade data was a little bit disappointing compared to the data flow in previous months," said Quijano-Evans, adding that generally there was a good backdrop for emerging markets with "10-year US Treasuries quite benign and the US dollar now waiting essentially for Trump's inauguration".
But fears of a trade war between China and the United States are hanging over Asian assets, with US President-elect Donald Trump threatening to brand Beijing a currency manipulator on his first day in office and slap high tariffs on Chinese goods.
Chinese mainland stocks fell 0.2% and are set to end the week down around 1.3%. Other key Asian exporters also sold off, with Taiwan stocks down 0.3% and Korea down 0.5%, but both were on track for a second week of gains.
Emerging equities overall reflected this, with the MSCI benchmark emerging equities index trading slightly lower on Friday but on track for a weekly rise of 1.8% in a third straight week of gains.
The weak Chinese data acted as a drag on Asian currencies, with China's onshore yuan weakening 0.1%, even though the midpoint was set firmer. But the offshore yuan hit its strongest level in a week after a report of fresh currency curbs, which was denied by authorities.
Hong Kong's overnight yuan borrowing rate was fixed at 7.57%, higher than the previous day's 2.69%.
South Korea's central bank kept interest rates at a record low of 1.25%, but slashed its 2017 GDP forecast due to a tepid outlook for consumption and uncertainty around Trump's policies.
Quijano-Evans noted that the Bank of Korea had raised concerns over spreading trade protectionism: "I think this is the first warning of a central bank in emerging markets about the risk of trade protectionism — this will be a major topic for emerging market central banks over the next few months."
The selling extended into emerging Europe, with Russian dollar-denominated stocks down 1.1% and Polish stocks down 0.3%.
Ratings agencies Moody's and Fitch will review Poland's sovereign credit ratings later on Friday, with analysts polled by Reuters not expecting any changes to ratings or outlooks.
The zloty was down 0.1% against the euro, trading in line with its regional peers.