Emerging Markets May Get Tough Lesson From Turkey on Complacency - Bloomberg

Emerging Markets May Get Tough Lesson From Turkey on Complacency - Bloomberg:

Turkey is probably going to remind emerging-markets traders the dangers of complacency this week. It’s a lesson that’s been in the making since May, when investors started to let their guards down and allowed their cautious optimism to morph into a wild search for yield, regardless of the risks.

Murat Uysal, who unexpectedly replaced Murat Cetinkaya as central bank governor earlier this month, will announce his first interest-rate decision on Thursday. While every estimate compiled by Bloomberg assumes a reduction, they range from 50 to 800 basis points. Even so, the lira was the best performer in emerging markets last week, rising 1.1%.

“A serious meltdown in the lira last summer started on July 24, when the central bank shocked financial markets by keeping interest rates on hold, confounding expectations of a hike,” Ziad Daoud, the Dubai-based chief Middle East economist at Bloomberg Economics, wrote in a report. “Fast forward exactly one year and one day, and the central bank could trigger another currency crisis with a deeper-than-expected cut,” he said, adding the market is pricing in a 200-250 basis point reduction.