Turkey's lira touched a three-month high on Friday as data showed January inflation topping forecasts, while emerging stocks paused near five-month highs ahead of the release of a key monthly US jobs report.
The lira inched higher against the dollar to add to gains of more than 5 per cent since the start of 2012. Data showed consumer inflation running at over 10 per cent year-on-year, indicating the central bank will need to stick to its tight monetary policy that supports the currency.
"Inflation remains too high and they need to deliver tighter monetary conditions...As long as that is being priced into the market then the lira will hold on really well," said Lars Christensen, chief emerging markets analyst at Danske Bank.
However, Turkish bonds shrugged off the inflation numbers as the central bank pumped 12 billion lira ($6.83 billion) into the banking sector in short-term loans, easing immediate liquidity conditions.
For Turkey, struggling with huge current account deficits, a lot rides on global conditions, which recently have been going in its favour.
Revived risk appetite this year has boosted emerging markets more than 14 per cent. Emerging equity funds took in $3.5 billion last week for a total of $11.3 billion in the year-to-date, while emerging market debt received $1.2 billion, according to data from EPFR Global.
The US jobs report, a key measure of growth in the world's largest economy, will be released at 1330 GMT. If strong, the results will further whet risk appetite.
The MSCI emerging equities index was flat ahead of the results, hovering near five-month highs.
Emerging sovereign debt spreads narrowed one basis point to 356 bps over US Treasuries, trading around the lowest since mid-November.
"We have come back completely from the December selloff both on currency and fixed incomes markets with overall sentiment remaining quite positive," Christensen said.
"The Fed has signalled quite clearly that it will continue to ease monetary policy going forward, and the European Central Bank is effectively now doing quantitative easing on a rather large scale. Not surprisingly that's helping markets, but the question is when will valuations begin to be stretched," Christensen said, questioning the resilience of central European currencies in particular.
Emerging European currencies were little changed ahead of the U.S. data, with the Hungarian forint up 0.1 per cent against the euro, just off 16-week highs, while Poland's zloty was flat against the common currency, hovering near five-month highs.
The forint and zloty have gained more than 6 per cent so far in 2012, recovering over half of their 2011 losses. The Czech crown, which trailed the rally in central European currencies in recent weeks, inched up 0.1 per cent to test a three-month high versus the euro.
Russia's rouble was little changed against a basket of currencies after the Russian central bank kept interest rates on hold as anticipated.
"Beyond the next couple of months...the case for monetary easing is likely to build - we expect growth to slow as the external environment starts to weaken once again, which should keep inflation pressures in check," Capital Economics said in a research note.
Emerging European stocks firmed, with Czech shares rising 0.3 per cent to a 21-week high, Polish shares up 0.2 per cent to just under a 12-week high and Russia's rouble- and dollar-denominated indices little changed, hovering near three-month peaks.
Turkish markets, which have gained more than 17 per cent in 2012, rose 0.4 per cent to over a four-month high, while South African shares, fell 0.3 per cent, but remained close to over three-year highs. ($1 = 1.7582 Turkish liras)