EM currencies climb to 2-week high on Omicron relief, lira extends rebound

Emerging market currencies climbed to two-week highs on Thursday and stocks gained for a third session in a row on expectations that the global economy can cope with the fast-spreading Omicron coronavirus variant.

The MSCI’s EM currencies index rose 0.3%, with the Turkish lira extending this week’s stunning rally from record lows after the government launched a series of measures to prop up the battered currency.

The lira firmed another 5% to 11.40 per dollar, taking its overall weekly gains to more than 40% and putting it on course for the best weekly showing ever, although in less liquid holiday markets.

Concerns about Ankara’s unorthodox economic policies including insistence of rate cuts at a time when inflation is surging has hammered the currency, pushing it to an all-time low of 18.4 on Monday.

The currency got a boost this week after President Tayyip Erdogan said the government and central bank would guarantee some local currency deposits against FX depreciation losses, still raising concerns among some investors.

“You have now got the fiduciary which is linked to the FX appreciation and that’s really bad because we don’t know where the money will come from. It’s could come from taxes and nobody is really happy about it,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

“This level of complication in the policy is going to turn back and hit the Turkish lira. Next month’s inflation figures could be that trigger point.”

Data on Turkey’s foreign exchange reserves for week ended December 17 is due later in the day.

Broadly, risk appetite improved as investors turned optimistic over the global economic recovery after data on showed a better-than-expected uptick in US consumer confidence and as some concerns over the severity of the Omicron coronavirus variant eased.

An index of developing world stock markets climbed 0.9%, mirroring gains in global equities.

Russia’s rouble firmed to its highest in more than a month against the dollar as President Vladimir Putin spoke at a news conference amid lingering concerns about a standoff between Russia and the West over Ukraine’s NATO aspirations.

Russia has moved tens of thousands of troops near its border with Ukraine but rejected Ukrainian and US charges that it may invade as early as next month.

Versus the euro, the Czech crown hovered near its strongest level since February 2020 after the central bank on Wednesday surprised with a 100 basis point interest-rate hike, saying it was ready to do more to rein in inflation.

Several central banks in the developing world have raised rates aggressively this year to combat a surge in inflation, but the prospect of tighter US rates, slowing Chinese economy and a strong dollar have kept EM assets under pressure this year.