LONDON, April 4 (Reuters) - The Turkish lira slumped half a percent on Friday, moving off recent three-month highs as comments from the prime minister renewed fears of political interference, leading a general emerging market retreat before U.S. jobs data.
Investors were waiting for the March U.S. non-farm payrolls later in the day to see if the world’s biggest economy is finally regaining momentum after an extreme winter. A robust jobs report could prompt the Federal Reserve to step up the pace of stimulus withdrawal - broadly seen as a negative for emerging markets.
The Turkish lira was most in focus after Prime Minister Tayyip Erdogan said the central bank should cut interest rates, raising fears the government would exert pressure on the bank to keep rates artificially low before August elections.
Inflation data on Thursday showed the central bank has little room for manoeuvre and Governor Erdem Basci said policy would stay tight in order to fight price growth. The bank implemented a massive rate rise at the end of January, resisting pressure from the government.
“This is certainly not what the market wants to hear from Erdogan in terms of trying to intervene in how the central bank behaves. The central bank has done well to regain market trust and the best strategy is for them to maintain the current approach and ward off pressure form the government,” said Societe Generale analyst Phoenix Kalen.
Noting that the lira had recovered some of its early losses, Kalen added: “People were concerned that the central bank would be pressured to do faster (policy) easing than might be prudent but the market does want to believe in the bank’s credibility.”
Investors have been returning to Turkish stocks and bonds as the lira stabilised and given the central bank’s decision to abandon unorthodox policies, but many remain worried.
“The Turkish central bank had been talking about unorthodox policies and now that’s completely out of the window. They’ve got themselves ahead of the curve and have flexibility to adjust,” Barings Asset Management portfolio manager Matthias Siller said.
“But reforms will be hostage to the political environment.”
Fitch cut its forecast for Turkey’s economic growth this year on Friday to just 2.5 percent, from 3.2 percent previously.
Emerging equities, which rose briefly into the black for the year earlier this week, eased 0.2 percent but were still on track to post their third straight week of gains.
Chinese shares outperformed, rising 0.7 percent, helped by a surge in rare earth stocks.
Indian stocks retreated for a second day after hitting record highs for the ninth session in a row.
In emerging Europe, Russian and Hungarian shares pulled back by 0.4 to 1 percent but Turkish markets gained 0.3 percent, on track for their fifth straight week of gains .
Kalen said there could be some modest negative pressure on Hungarian assets as a weekend election is expected to produce a landslide win for the ruling Fidesz party whose policies are opposed by many Hungarian and foreign banks.
However the forint has rallied along with other emerging markets in recent weeks and is trading near the highest since end-January versus the euro.
In bond markets, Ecuador, which defaulted on its debt in 2008-2009, was on a roadshow that investors says is aimed at marketing an upcoming dollar bond. Other ongoing roadshows include Pakistan and Zambia.
They are all expected to get a good reception for their bonds, despite their high-risk nature, as investor appetite for emerging markets returns. Data from fund tracker EPFR Global shows that emerging stocks and bonds took in around $3.5 billion in the week to April 2 after shedding more than $50 billion in the first three months of the year.
For GRAPHIC on emerging market FX performance 2014, see link.reuters.com/jus35t
For GRAPHIC on MSCI emerging index performance 2014, see link.reuters.com/weh36s
For GRAPHIC on MSCI emerging Europe performance 2014, see link.reuters.com/jun28s
For GRAPHIC on MSCI frontier index performance 2014, see link.reuters.com/zyh97s
For CENTRAL EUROPE market report, see
For TURKISH market report, see
For RUSSIAN market report, see ) (Additional reporting by Natsuko Waki; Editing by Susan Fenton)