Turkish lira rebounds but strong dollar still a threat for emerging markets

Turkey's lira bounced back on Tuesday morning but after jitters spread to India, Argentina and South Africa analysts warned that emerging markets would continue to be tested by the strong dollar.

The lira rallied 6.5% against the US dollar to TL 6.436 by 0920 BST on Tuesday, having lost around 10% of its value the day before.

Some analysts pointing to the actions of the Turkish central bank, providing some liquidity relief for local banks, and possible bargain-hunting by investors.

But this did not come before the tension in emerging markets spread to other economies, with India’s rupee slipping to a record low against the dollar on Tuesday, with early trade seeing a dollar buy 70 rupees at one point, before coming back as local traders reported that the central bank may have stepped in to stabilise the currency.

This followed a chaotic plunge for the Argentine peso overnight in spite of the central bank's raising interest rates five further percentage points to an incredible 45%.

The South African rand had been hit on Monday but was coming off its lows on Tuesday, up 2.4% on the dollar.

"The dollar is crushing everything in its path at the moment and this is not good for EM or global growth," said Neil Wilson at Markets.com. "However, the fears of contagion can be overegged and we note that the dangers so far seem confined to countries with large current account deficits and high dollar financing, as well as some corporates, largely banks, with exposure to that debt.

"Nevertheless, as stimulus is gradually unwound, we are seeing the markets test countries with exposure to dollar debt in a way not seen for some years."

After the large sell-off triggered by the rout in Turkey, some investors may have bought emerging currencies on dips, said Toru Nishihama, an emerging-market economist at Dai-ichi Life Research.

“The global economy is still expanding and that’s providing underlying support for the emerging markets. But Turkey’s problems from its spat with the US, issues of central bank independence and inflationary pressures are not resolved, which means downward pressure on Turkish assets will continue for a while.”

“Concerns will linger over who could be the next hit. Would that be South Africa because of its weak fundamentals or Russia with deteriorating relations with the US or Mexico where the peso has been purchased on expectations surrounding the new president but no concrete outcome has been delivered?” Nishihama said.