Emerging FX-Mostly weak in thin volume; Turkey gains

By Sujata Rao

LONDON, Oct 18 (Reuters) - Emerging market currencies were mostly weaker on Wednesday as uncertainty over the global backdrop kept most of the sector under pressure, though the high-yield Turkish lira gained half a percent.

Mixed U.S. inflation data, strong fund flows into the United States and weaker-than-expected industrial production numbers on Tuesday did little to clarify the direction of U.S. interest rates, meaning dealers are waiting for more key consumer inflation data, due at 1230 GMT.

Most emerging currencies consequently closed weaker on Tuesday except the Slovak crown which received a credit upgrade from Moody's and raced to a record high versus the euro.

"This is not a signal of a reversal in emerging markets but profit-taking in line with the emerging equity correction we saw in recent days. Globally, I'd say the situation is still favourable for emerging markets," said Murat Toprak, currency strategist at Societe Generale in London.

He said recent data has not dissipated expectations U.S. economic growth will be resilient and more interest rate rises are unlikely -- a favourable backdrop for emerging markets.

But investors wish to see further proof of this and emerging market rallies are consequently proving shortlived.

"After euro/forint fell so strongly last week and we saw massive rallies in the rand and lira, we were bound to see a correction," Toprak added.

The zloty fell almost half a percent to 3.90 per euro though it failed to sustain a brief break of 3.91 <EURPLN=>. The forint pared losses after falling to a week-low around 268 per euro.

The Slovak crown which rallied to a record high of 36.69 per euro eased slightly in line with its neighbours to 36.80 <EURSKK=>. The Moody's upgrade was seen as a reward for a prudent budget that keeps alive 2009 euro accession hopes.

Dealers said thin volumes exaggerated moves but falls to 28.40 on the Czech crown and 3.91 on zloty had failed to hold.

"We are seeing a technical retracement but there is no real news driving it. The market got a bit ahead of itself recently," a trader said. "I think euro/CEE-4 should come off again soon."

If Polish producer inflation data, due later on Wednesday, proves benign, bonds could receive a boost, analysts say.

LIRA GAINS

Elsewhere, the lira firmed 0.5 percent to 1.4735 per dollar <TRY=>, supported by Citibank's $3 billion purchase of a stake in Turkish Akbank and news that Ankara will soon sell part of the second-largest Halkbank to a strategic investor.

Turkey's stock market rallied almost 1.5 percent after recent losses. Bond yields however have stayed high, keeping above 21 percent on the benchmark 2008 issue.

Traders said Turkey is seeing healthy flows in line with interest in high-yield plays.

"The dollar/Turkey move is a high rate EM move. The market is getting very long Turkey again, positions are getting back to May levels," a dealer said. "Any time we see a retracement in Turkish assets, people just pile in again."

Toprak of Socgen was optimistic on the lira, noting that foreign direct investment thanks to privatisations will cover 60 percent of the country's current account deficit this year.

The South African rand rose 0.20 percent after falling almost 2 percent on Tuesday <ZAR=d3> but the currency could get a boost if gold breaks above $600 an ounce.

JP Morgan suggested building a short dollar/rand position.

"Risk appetite appears to be recovering globally, and we see room for a firmer tone in commodity prices to push dollar/rand back below 7.50. The technical position also favors rand gains," the bank said in a note. ((Reporting by Sujata Rao; London newsroom +44 20 7542 6176 sujata.rao@reuters.com; editing by David Stamp))

Keywords: MARKETS EMERGING FOREX

 CURRENCY                LATEST    PREV   LOCAL    LOCAL   
                                   CLOSE  CURRENCY CURRENCY 
                                          PCT CHG  PCT CHG 
                                                   IN 2006 
 EUROPE/MIDDLE EAST/AFRICA 
 Czech Rep.   <EURCZK=>   28.32     28.27   -0.17    +2.64 
 Poland       <EURPLN=>    3.90      3.88   -0.43    -1.47 
 Hungary      <EURHUF=>  266.98    266.28   -0.26    -5.49 
 Slovakia     <EURSKK=>   36.73     36.76   +0.08    +3.00 
 Romania      <EURRON=>    3.52      3.51   -0.31    +4.56 
 Ukraine      <UAH=>       5.05      5.05   -0.03    -0.03 
 South Africa <ZAR=>       7.61      7.61   -0.11   -17.15 
 Kenya        <KES=>      71.90     71.90   +0.00    +0.63 
 Israel       <ILS=>       4.27      4.26   -0.22    +7.68 
 Turkey       <TRY=>       1.47      1.48   +0.47    -8.41 
  
 LATAM 
 Mexico       <MXN=>      10.85     10.84   -0.09    -2.09 
 Brazil       <BRL=>       2.13      2.13   +0.09    +9.76 
 Venezuela    <VEB=>    2144.60   2144.60   +0.00    +0.00 
 Chile        <CLP=>     529.55    529.50   -0.01    -2.93 
  
 ASIA 
 Singapore    <SGD=>       1.58      1.58   +0.13    +5.53 
 Hong Kong    <HKD=>       7.78      7.78   -0.05    -0.39 
 Indonesia    <IDR=>      9,153     9,150   -0.03    +7.23 
 China        <CNY=>       7.90      7.91   +0.03    +2.08 
 Thailand     <THB=>      37.37     37.34   -0.08    +9.75 
 Philippines  <PHP=>      49.88     49.90   +0.04    +6.21 
 Taiwan       <TWD=>      33.17     33.14   -0.07    -1.22 
 South Korea  <KRW=>      0,955     0,954   -0.12    +5.48 
 India        <INR=>      45.33     45.19   -0.30    -0.78 
  
 For full regional quote listings, double click on the following codes: 
 Africa <AFFX1=> 
 Asia <ASIAFX=> 
 Central/Eastern Europe <EEFX=> 
 Latin America <LATAMFX=> 
 Middle East <MEFX=> 
         
  Keywords: MARKETS EMERGING FOREX  xref=2