Turkish lira set for worst week in nearly three months, rouble rises

Russia’s central bank cuts rate to pre-crisis level.
An assortment of Turkish Lira banknotes. Image: Chris Ratcliffe/Bloomberg

Turkey’s lira headed for its worst week since March on Friday as surging inflation fanned fears of more policy tightening, while the Russian rouble firmed even as the central bank cut rates.

The rouble gained as much as 56.72 to the dollar, its highest level in more than two weeks.

The Russian central bank cut its key interest rate by 150 basis points to its pre-crisis level of 9.5% and the country eased some capital controls.

Lower rates pressure the rouble and support prices of OFZ treasury bonds, but the currency is still supported by capital controls that have been steering it since Moscow invaded Ukraine on Feb. 24.

“The rouble is almost impossible to trade for a vast majority of international investors now, so any impact of monetary policy decision on the rouble is likely to be limited,” said Piotr Matys, senior FX analyst at In Touch Capital Markets in London.

“The larger-than-expected cut is a reflection of growing confidence amongst Russian policymakers that inflation has already peaked, the shock caused by war in Ukraine is most likely over.”

The Turkish lira weakened to 17.27 at one point against the dollar, bringing it closer to record lows hit in late December as a pledge by President Tayyip Erdogan to keep interest rates low earlier in the week upped selling pressure on the currency.

For the week, the lira was down 4.6% and set to mark its biggest weekly decline in nearly three months.

Turkey’s treasury said a series of new “solution-oriented steps” would be announced for the economy beleaguered by surging inflation and a sliding lira. The announcement helped stem some declines in the currency, but the relief proved to be short-lived.

The country’s 5-year credit default swaps touched a 14-year high of 790 basis points, according to S&P Global.

Emerging market assets came under pressure this week as concerns re-emerged about COVID-19 curbs in China after Shanghai imposed new lockdown restrictions. MSCI’s indexes for EM stocks and currencies were set for their first weekly declines in four.

South Africa’s rand rose 0.6% against a weakening dollar and headed towards its fourth straight weekly gain. Stocks in the region dropped 0.5%.

The greenback lost some steam as investors awaited U.S. consumer price data for May, which will be the last key piece of inflation data before the Federal Reserve’s policy meeting next week. Expectations are for a 50 basis point hike to the lending rate.

Separately, BofA flows data showed EM bonds suffered outflows for a ninth straight week and stocks declined for a fifth consecutive week, losing $1.3 billion and $1.6 billion, respectively.

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