Lira plumbs all-time low on policy misstep fears

Turkey's lira hit a record low on Wednesday on worries about monetary policy missteps, while emerging market stocks snapped a seven-day rally with rising COVID-19 cases hurting sentiment.

After falling almost 3% on Tuesday, the lira slipped further to 10.45 to the dollar, bringing 2021 losses to 28% - the worst among EM peers. Bowing to political pressure, the central bank is seen cutting the policy rate by 100 basis points to 15% on Thursday, which would see the rate down by 400 bps since September, while inflation surges to almost 20%. Erdogan has replaced several central bank chiefs and members in his drive to lower rates in the hopes it will spur economic growth.

"After one further 100bp rate cut at the November meeting, the central bank will likely stop its front-loaded easing cycle, at least until the year-end," said Muhammet Mercan, chief economist - Turkey at ING, citing moderation in some core inflation indicators among others. Most other EM currencies bounced after a dollar rally post strong U.S. retail sales data on Tuesday had bruised riskier currencies as investors raised policy tightening bets in the United States.

MSCI's index of EM currencies was flat after posting its worst session in 10 weeks, with the Chinese yuan rising 0.2%, while South Africa's rand and Russia's rouble rose 0.3% and 0.5% respectively. The rand hit its lowest since early January, before firming. State power utility Eskom said it saw an increased risk of rotational power cuts as many of the units at its power stations were not operating at full capacity due to unplanned maintenance.

After data on Wednesday showed inflation for October remained unchanged over the previous month, September retail sales later are seen contracting significantly ahead of the central bank's rate decision on Thursday. A Reuters poll sees the rate being held at 3.5%, but most participants said it's too close to call.

Rising geopolitical tensions over Ukraine and Belarus had seen Russia's rouble surge past 73 to the dollar. It was back below that level on Wednesday, despite falling oil prices. Emerging market stocks dipped 0.1% into the red with a 1.2% slide in South Korean shares leading the pack in Asia, as COVID-19 cases rose in Southeast Asian countries.

But gains for mainland China shares and a fresh record high for South African shares were among those limiting losses for the broader index. Turkey stocks rose 0.4% after a day's pause. The index has risen for 20 of the last 22 sessions. It surged almost 23% in that time, scaling a record high on Tuesday.