Lira's Fate Tops Bill in Week of Emerging-Market Rate Decisions

(Bloomberg) -- As Turkey gears up for a key interest-rate decision this week, options traders remain more bearish on the lira than every other emerging-market currency except the ruble.

Turkish Central Bank Governor Murat Cetinkaya said on the weekend policy makers will tighten borrowing costs “if needed” Wednesday, boosting speculation they’ll anchor the currency with higher rates ahead of an election set for June. Russia’s central bank will probably hold its own benchmark rate steady at a meeting Friday, backing away from its guidance for faster cuts this year, after the latest round of U.S. sanctions jolted the ruble and threatened to touch off inflation.

“There is an increasing likelihood that Turkey’s central bank will tighten policy further in an attempt to make sure the lira stays stable in the run-up to the June election,” said Henrik Gullberg, a strategist at Nomura International Plc in London. Russia’s central bank “is still expected to stay put on rates as current inflation is well below the 4 percent target and the bank likely needs some time to estimate the effects of the weaker ruble.”

What you Need to Know About Emerging Markets This Week: Audio

While the ruble and lira outperformed peers last week, options show traders were still looking to protect themselves against more weakness. Risk reversals showed the premium on contracts to sell Russia’s ruble and Turkey’s lira versus the dollar in a month’s time over those to buy were about 3 percentage points and 1.9 percentage points, respectively, the highest across developing nations.

Investors will also monitor the impact of higher U.S. Treasury yields and any renewed steepening on the curve on developing-nation debt. A Bloomberg Barclays gauge fell below its 50-day moving average last week, signaling further losses. Spreads between Treasury maturities narrowed to the lowest in more than a decade, before steepening as the week drew to a close. The benchmark U.S. 10-year yield reached a new 2018 peak of about 2.996 percent Monday, its highest since January 2014.

READ MORE: Fidelity Sees Warning Sign for EM Bulls in Flattening U.S. Curve

Developing-nation stocks fell 0.8 percent Monday, adding to a 1.3 percent slide from Friday. Emerging-market currencies slipped 0.5 percent, extending three weeks of losses.

Raise, Hold and Cut

About a week after President Recep Tayyip Erdogan’s decision to hold snap elections, the nation’s central bank officials will meet Wednesday to set monetary policy. There’s optimism that Erdogan will put aside his long-held dislike for high borrowing costs in order to bolster the lira ahead of the election. Analysts see policy makers raising the late liquidity lending rate by 50 basis points to 13.25 percent, according to estimates compiled by Bloomberg.

Such a move might cause the lira to strengthen to about 3.92-3.94 per dollar in the run-up to the election, according to Nomura. The currency fell 0.4 percent to 4.0911 per dollar on Monday.

Meanwhile, Russian officials and analysts were quick to defend the country from U.S. President Donald Trump’s accusations of currency manipulation. What Trump called “playing the currency devaluation game” was simply the market doing its job, Bank of Russia First Deputy Governor Ksenia Yudaeva said on Friday. Central bank officials will probably keep the key interest rate unchanged at 7.25 percent at their meeting Friday.

Hungary’s central bank is set to maintain its benchmark rate, according to all of the economists surveyed by Bloomberg. The forint has appreciated 0.3 percent against the euro this month, outpacing most of its central European peers.

Finally, as inflation continues to ease in Colombia, the central bank is expected to cut rates by 25 basis points to 4.25 percent on Friday and keep the door open for further monetary easing. Policy makers are also likely to discuss the strengthening of the peso, which has posted the best return among global currencies this year. Governor Juan Jose Echavarria has said the rally is “strange,” given the country’s current-account deficit.

Mexico in the Spotlight

After last week’s selloff in Mexican assets, traders will have a series of events to digest over the next few days. In the first presidential debate on Sunday, Mexican candidates picked apart front-runner Andres Manuel Lopez Obrador’s proposals to improve security and combat corruption, which lacked the sort of surprises that may be needed to shift their respective positions in the polls.

The top ministers leading Nafta talks will meet again Tuesday in Washington. “We are basically working very hard, but I think there’s still a lot of work to do,” Mexican Foreign Minister Luis Videgaray said after a meeting on Friday. President Trump has been pushing for a quick resolution with Mexico and Canada, and leaders of the countries say a deal could be completed within weeks, although differences remain on key issues.

Friends Again?

Investors will be eyeing the first summit between South Korean President Moon Jae-in and North Korea’s Kim Jong Un on April 27. The two leaders may announce an official end to the military conflict between the two countries, which are still technically at war, the Munhwa Ilbo newspaper reported last week, citing an unidentified South Korean official. No treaty has been signed to replace the 1953 armistice that ended the Korean war.

A successful meeting may pave the way for talks between Kim and Trump -- the first between a sitting U.S. president and North Korean leader. Kim accepted a U.S. request to inspect the regime’s nuclear test site during his recent meeting with CIA Director Mike Pompeo, South Korea’s Herald Business newspaper reported, citing unidentified sources. The won is trading near its strongest level since 2014 amid easing geopolitical tensions in the Asian region.

And...Release

China’s decision to cut bank reserve-requirement ratios takes effect on April 25. The yield on Chinese 10-year government debt fell 16 basis points on Wednesday, the biggest drop since December 2016, after the central bank announced the move. The lower ratio will release about 1.3 trillion yuan ($207 billion) in liquidity, with 900 billion yuan of that used to repay money banks borrowed from the central bank under its medium-term lending facility, the People’s Bank of China said.

Data, and More Data

Brazilian inflation data will be released on Friday, after the latest figures supported the case for an additional interest-rate cut next month. Swap rates are pricing a reduction of about 25 basis points of the Selic rate to 6.25 percent.

South Korea and Taiwan are due to report preliminary figures on first-quarter gross domestic product growth on Thursday and Friday, respectively.

To contact the reporters on this story: Netty Ismail in Dubai at nismail3@bloomberg.net, Aline Oyamada in Sao Paulo at aoyamada3@bloomberg.net, Lilian Karunungan in Singapore at lkarunungan@bloomberg.net.

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Justin Carrigan

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