EM FX was mostly softer last week as the broad dollar rally continued. COP, HUF, and MXN outperformed while ARS, ZAR, and KRW underperformed. The dollar has posted four straight weekly gains on the back of strong U.S. data and higher U.S. interest rates. This should continue this week, with July retail sales expected to show continued strength in consumption. U.S. financial conditions remain loose and so the Fed needs to do more to slow the economy down. As a result, the dollar is likely to continue gaining.
AMERICAS
Brazil reports June GDP proxy Monday. Growth is expected at 1.80% y/y vs. 2.15% in May. If so, it would be the slowest since December. Growth should pick up in the coming months after the central bank started the easing cycle this month with a 50 bp cut and signaled it would continue cutting rates at 50 bp clips for the time being. Next COPOM meeting is September 20 and a 50 bp cut to 12.75% is expected. The swaps market is pricing in 100 bp of easing over the next three months followed by another 150 bp over the subsequent three months.
Chile central bank releases its minutes Monday. At that July 28 meeting, the bank delivered a dovish surprise and cut rates 100 bp to 10.25% vs. 75 bp expected. The decision was unanimous and the bank warned that “The board estimates that, in the short term, the MPR will accumulate a somewhat stronger reduction than was considered in the Monetary Policy Report’s central scenario, in line with the results of the surveys conducted prior to this meeting.” Next meeting is September 5 and another 100 bp cut seems likely. The swaps market is pricing in 150 bp of easing over the next three months followed by another 175 bp of easing over the subsequent three months. Q2 GDP and current account data will be reported Friday. GDP is expected at -0.6% q/q vs. 0.8% in Q1, while the y/y rate is expected at -1.4% vs. -0.6% in Q1.
Colombia reports June IP and retail sales Monday. June trade and Q2 GDP will be reported Tuesday. The economy is clearly slowing and so the central bank is likely preparing to start an easing cycle. At the last policy meeting July 31, the central bank left rates steady at 13.25% but the minutes warned that inflation remains “excessively high compared with that observed in both the major advanced countries and similar economies in Latin America.” The bank “acknowledged that the fight against inflation is not over. In this regard, they agreed on the need to maintain the current restrictive stance of monetary policy, until they see convincing signs of the convergence of inflation toward its target.” Next policy meeting is September 29 and no change is expected then. However, the swaps market is pricing in 25 bp of easing over the next three months followed by another 100 bp of easing over the subsequent three months.
EUROPE/MIDDLE EAST/AFRICA
Israel reports July CPI Tuesday. Headline is expected at 3.5% y/y vs. 4.2% in June. At the last policy meeting July 10, the Bank of Israel left rates steady at 4.75% and Governor Yaron warned that “We are in an environment of great uncertainty, and there are several upside risks to inflation pressures. It is certainly possible that we will need to increase the interest rate going forward, if we see evidence that the inflation environment is not moderating at a suitable pace.” Next meeting is September 4 and no change is expected then. The swaps market is pricing in steady rates over the next six months followed by the start of a modest easing cycle over the subsequent six months. Q2 GDP data will be reported Wednesday and is expected at 2.4% SAAR vs. 3.2% in Q1.
Poland reports Q2 GDP and July core CPI Wednesday. GDP is expected at -2.1% q/q vs. 3.8% in Q1, while the y/y rate is expected at -0.2% vs. -0.3% in Q1. The economy remains weak and the central bank is itching to start an easing cycle. At the last policy meeting July 6, the bank kept rates steady at 6.75%. Next policy meeting is September 6 and no change is expected then. The swaps market is pricing in 50 bp of easing over the next three months followed by another 75 bp over the subsequent three months.
ASIA
India reports July CPI and WPI Monday. CPI is expected at 6.43% y/y vs. 4.81% in June, while WPI is expected at -2.50% y/y vs. -4.81% in June. The Reserve Bank of India just left rates steady at 6.5% last week but maintained a hawkish bias. Like the last policy meeting June 8, the vote to hold was unanimous and the bank kept its bias towards “removal of accommodation” by a 5-1 vote. Governor Das stressed that ““The MPC is prepared to act if the situation so warrants. Bringing headline inflation within the tolerance band is not enough. We need to remain firmly focused on bringing inflation within the 4% target.” Next policy meeting is October 6 and no change is expected then.
People’s Bank of China sets its key 1-year MLF rate Tuesday and is expected to keep it steady at 2.65%. July IP, retail sales, fixed asset investment, and property investment will also be reported Tuesday. IP is expected at 4.3% y/y vs. 4.4% in June, sales are expected at 4.2% y/y vs. 3.1% in June, FAI is expected to remain steady at 3.8% YTD, and property investment is expected at -8.0% YTD vs. -7.9% in June. Even though the economy remains weak, policymakers have reluctant to inject large-scale stimulus, as evidenced by the weak July money and new loan data reported last week.
Philippine central bank meets Thursday and is expected to keep rates steady at 6.25%. At the last policy meeting June 22, the bank kept rates steady and Governor Medalla said there was little reason to hike or cut rates then. He added that the bank would have room to cut if inflation is below the 3% target in January or February. The swaps market is pricing in steady rates over the next six months followed by the start of an easing cycle over the subsequent six months.
Malaysia reports Q2 GDP, current account, and July trade data Friday. Growth is expected at 3.5% y/y vs. 5.6% in Q1. If so, it would be the slowest since Q4 2021. No wonder the central bank turned less hawkish and stopped the tightening cycle at the July 6 meeting. Next meeting is September 7 and rates are likely to be kept steady at 3.0% again. The swaps market sees steady rates over the next six months.
