Emerging market currencies were swept up in the turmoil gripping markets over Turkey on Monday, driving investors into havens.
The Turkish lira at one point plunged a further 11 per cent in early Asian trading to a record low of TL7.24 to the dollar, and remained under pressure despite some relief from central bank measures intended to shore up liquidity for the country’s banks. The lira later pared losses to trade at TL6.90, still down 6.8 per cent but off its earlier low.
In South Africa, the rand tumbled more than 10 per cent at one point, its biggest intraday drop in almost a decade, to a two-year low at R15.474 per dollar, but recovered to stand at R14.24 by the early afternoon in London.
The Indian rupee weakened to just beyond Rs70 per dollar, before recovering to trade at Rs69.84.
The Indonesian rupiah touched its weakest level in nearly three years, down more than 1 per cent to Rp14.625 per dollar, but recovered some of that to trade at Rp14.590. The rupiah’s fall prompted Indonesia’s central bank to intervene to support the currency, according to Reuters.
“In terms of emerging markets risk in the longer run, I find this latest episode a little disquieting,” said Cliff Tan, east Asian head of global markets research at MUFG. “Those countries with current account deficits and places with political corruption — in these circumstances, people are looking for excuses to exit the market.”
Contrasting with weakness in European and Asian bourses, US equities edged up in early trading, with the benchmark S&P 500 rising 0.3 per cent.
European stocks were modestly lower in early afternoon trading, with the benchmark Stoxx Europe 600 falling 0.3 per cent. European banks with significant exposure to Turkey, including Spain’s BBVA, Italy’s UniCredit and France’s BNP Paribas, all had early drops of 1 per cent or more. BBVA had traded down about 3.4 per cent by early afternoon, and UniCredit was 3.6 per cent lower.
“Depending on how the situation proceeds, there may be somewhat significant capital and earnings implications for the most-exposed banks,” analysts at Deutsche Bank noted. But we do “not expect systemic implications and believe the impact should be broadly manageable for European banks”.
The shift from riskier assets saw the yield on the benchmark 10-year US Treasury falling 1 basis point to 2.87 per cent, although the move was reversed as Wall Street opened.
The dollar remained near its strongest level in 13 months. The euro dropped as much as 0.4 per cent to $1.1365 on Monday morning, but later erased much of that drop to trade at $1.1426.
Mansoor Mohi-uddin, head of foreign exchange strategy at NatWest Markets, said sentiment towards the lira was “likely to remain fragile” unless Turkey undertakes more meaningful measures such as a “series of substantive rate hikes”.
The lira has plummeted by more than 40 per cent this year, losing a fifth of its value over the past week alone, amid an intensifying dispute with US president Donald Trump.
Investors also sold out of equities in Asia with Japan’s Topix index closing down 2.1 per cent, while China’s benchmark CSI 300 finished 0.4 per cent lower. Despite fears of contagion, analysts said Asia was generally well-placed to cope.
Trinh Nguyen, a senior economist for emerging Asia at asset manager Natixis, said emerging Asian economies had “ample foreign exchange reserves” relative to short-term debt, while many had current account surpluses that would support their currencies.
