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| 11 January, 2017

Turkish lira's slump sours emerging market mood

A money changer counts U.S. dollar bills, with Turkish lira banknotes in the background, at an currency exchange office in central Istanbul, Turkey, August 21, 2015.

A money changer counts U.S. dollar bills, with Turkish lira banknotes in the background, at an currency exchange office in central Istanbul, Turkey, August 21, 2015.

REUTERS/Murad Sezer
By Sujata Rao

LONDON, Jan 11 (Reuters) - The Turkish lira skidded 2 percent to record lows on Wednesday, unnerved by authorities' failure to announce decisive stabilising steps as the currency decoupled from broader emerging markets, which mostly traded firmer.

The lira has already lost 8.5 percent against the dollar this year - the world's worst-performing big currency - shrugging off the central bank's Tuesday move to add dollar liquidity to financial markets and a smaller-than-expected current account deficit.

The moves are filtering through to bond markets, with local 10-year yields opening some 30 basis points (bps) higher and dollar bonds falling 0.7-1.0 cent lower across the curve.

Options markets indicate more pain for the currency, with one-month risk reversals, which measure the relative demand for options on a currency rising or falling against the dollar, showing a bias for further weakness.

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"It's January, but the lira has gone through most people's year-end forecasts. I think it can keep weakening if the central bank doesn't do something as flow pressures will work against it," said UniCredit strategist Kiran Kowshik.

Kowshik noted Turkey's weaknesses: regular militant attacks that deter tourism and investment, negative real interest rates and an annual external funding requirement of around 30 percent of GDP - far higher than most big emerging markets.

"At the end of the day they need to get real rates significantly higher ... They need to do in one shot and they need to do it quickly," said Kowshik who reckons a 300 bps hike may be needed.

But Turkey was an outlier among emerging markets. MSCI's main emerging equity index tracked world stocks higher, reaching two-month highs .

Turkish stocks, however, fell 0.5 percent

Many reckon U.S. President-elect Donald Trump's 1600 GMT press conference will offer detail on his infrastructure spending plans, a potential positive for global commodity prices. The rand and rouble traded marginally firmer against the dollar.

There was calm on the China front as Beijing loosened its grip on offshore yuan money markets, causing overnight borrowing costs to fall sharply.

However, the Mexican peso was trading near record lows despite $2 billion in central bank interventions last week as many investors braced for more belligerent comments from Trump on trade and immigration .

"The factors driving the peso now are, first, expectations on Trump's presidency and in particular his press conference today and, second, concern about government finances and rating downgrades," analysts at SEB told clients.

They raised the possibility that the government could be forced to reverse recent gasoline price increases, hitting finances.

"Market fears that the administration ... will fail to consolidate public finances will also weigh on the peso over the coming weeks and months. Expect dollar/peso to touch new highs 22.00," SEB said.

In contrast to Mexico, Brazil's real traded just off two-month highs ahead of an expected 50 bps interest rate cut later in the day .

The zloty was flat, with Polish interest rates seen holding steady .

The Czech crown, meanwhile, continued to firm in forward markets after inflation reached four-year highs, raising investor conviction that the currency's cap against the euro will be scrapped by mid-year. The Czech crown could climb 3.5 percent against the euro by the end of 2017, a Reuters poll predicted.

The six-month crown forward contract implied an exchange rate of 26.684, the strongest since currency interventions started in November 2013. The spot rate is 27 per euro .

On bond markets, Israel opened books on a dual tranche 10- and 20-year euro issue



(Editing by Larry King) ((sujata.rao@thomsonreuters.com; +44 20 7542 6176 sujata.rao.thomsonreuters.com@reuters.net))