(Bloomberg) -- Turkey and Brazil intensified efforts to protect their currencies from speculative attacks by investors as emerging markets face their biggest test since the 2013 taper tantrum.
Turkey surprised analysts by tightening monetary policy Thursday for the third time in less than two months, while Brazil’s central bank sold extra foreign-exchange swap contracts for the second time this week, boosting investors’ protection again further declines in the currency. The lira surged, while the real only briefly pared losses.
Thursday’s actions are the latest in a series of efforts to shore up defenses in developing nations as policy makers from Argentina to India try to cope with higher U.S. interest rates, growing budget deficits, accelerating inflation and political instability. Emerging markets haven’t been in this precarious a position since five years ago, when concern the developed world was pulling back on monetary stimulus sparked a rout in stocks and currencies.
"The failure to act preemptively to address macro imbalances has forced those central banks to take desperate measures to stem the pressure on their currencies," said Delphine Arrighi, a money manager at Old Mutual in London. "The risk is a tightening of financial conditions in EM that could ultimately impact growth negatively."
Turkey raised its one-week repo rate by 1.25 percentage point to 17.75 percent, a bigger increase than any analyst surveyed by Bloomberg had predicted. The move signaled policy makers trying to clamp down on double-digit inflation are willing to stand up against political pressure to keep borrowing costs low.
“Is this the start of a new era of Turkish central bank policy -- actually moving ahead of the market? Let’s hope so,” said Nigel Rendell, a senior analyst for EMEA at Medley Global Advisors. “Positive impact on the lira is seen as the repo rate rises.”
A combination of a rising dollar, spiraling inflation, widening budget and current account deficits, and political pressure for lower rates spurred a flight from lira assets in May. The central bank responded to the rout by first raising its late-liquidity window by 3 percentage points at an unscheduled meeting, and then announcing a decision to simplify its interest-rate regime.
Today’s move sent Turkey’s lira up 1.2 percent to 4.45047 per dollar as of 2:33 p.m. in New York.
In Brazil, policy makers sold an additional 40,000 foreign-exchange swap contracts Thursday to reduce pressure on the local currency, marking the second time this week it’s gone beyond its usual offer of 15,000 contracts daily.
The real has tumbled 15 percent this quarter, the most among major currencies, amid an increasingly bearish view of the economy. The selloff picked up steam amid a 10-day truckers strike that paralyzed the country last month and sidelined much of the government’s efforts to rein in a fiscal deficit. Political uncertainty ahead of presidential elections in October and rising global interest rates have only added to woes.
"There’s a huge concern over the electoral scenario and local investors are searching for safety," Goldman Sachs’ senior economist Alberto Ramos said. "It’s perfectly possible for the real to weaken to above 4.00 per dollar. There is nothing magical about that level."
Economists have been slashing forecasts and now see Brazil’s economy growing about 2.2 percent this year, from a previous 3 percent, according to a survey from the central bank. More downside revisions are on tap, with JPMorgan Chase & Co. recently lowering its expansion call to a mere 1.2 percent this year.
The real was down 1.3 percent to 3.9022 per dollar, after earlier falling almost 3 percent.
“Intervention can provide temporary relief and limit currency weakness, but in and of itself is unlikely to be enough to turn weakness into strength,” said Erik Nelson a currency strategist at Wells Fargo in New York. “To see a more sustained recovery in the Brazilian real, you’ll likely need to see a more significant shift in the market narrative around the currency.”
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