EM Preview for the Week of February 26, 2023

February 26, 2023

EM FX was mostly softer last week as the broad-based dollar rally continued on the back of strong U.S. data. COP, PHP, and PEN outperformed and were able to eke out small gains against the greenback, while CLP, ZAR, and RON underperformed. After last Friday’s PCE shocker, we expect Fed officials to come out swinging this week and maintaining a very hawkish tone. As such, the dollar should continue to gain.


Mexico reports January trade data Monday. Banco de Mexico releases its quarterly inflation report Wednesday. In its last report November 30, the bank raised its 2023 growth forecast to 1.8% vs. 1.6% previously and kept its 2023 inflation forecast unchanged at 4.1%. Since then, headline inflation has accelerated modestly to 7.91% y/y in January from 7.80% in November. At the last policy meeting February 9, the bank delivered a hawkish surprise with a 50 bp hike to 11.0% vs. 25 bp expected. The bank “deemed that, given the dynamics of core inflation, on this occasion it is necessary to continue with the magnitude of the reference rate adjustment. Given the monetary policy stance already attained and depending on the evolution of incoming data, for its next policy meeting, the upward adjustment to the reference rate could be of lower magnitude.” The swaps market is now pricing in a peak policy rate near 11.75% vs. 11.0% before that last hike. Next meeting is March 30 and a 25 bp hike to 11.25% seems likely given the latest forward guidance.

Brazil reports January central government budget data Monday. A primary surplus of BRL79.6 bln is expected vs. BRL4.4 bln in December. Consolidated budget data will be reported Tuesday. Fiscal policy will be a major driver for Brazil assets this year. If President Lula loosens policy, the central bank is likely to offset it with tight monetary policy and risks further attacks from Lula. Next COPOM meeting is March 22 and rates are likely to be kept steady at 13.75%. The market is pricing in the start of an easing cycle in the next six months but that seems unlikely if the central bank remains under attack. February trade data will be reported Wednesday. Q4 GDP data will be reported Thursday, with growth expected at -0.3% q/q vs. 0.4% in Q3. The y/y rate is expected at 2.3% vs. 3.6% in Q3.

Chile reports January IP and retail sales data Tuesday. IP is expected at 0.4% y/y vs. -1.0% in December, manufacturing production is expected at -4.5% y/y vs. -4.1% in December, and sales are expected at -11.0% y/y vs. -11.1% in December. January GDP proxy will be reported Wednesday and is expected at -0.7% y/y vs. -1.0% in December. The economy slowed significantly over the course of 2022 but is showing some signs of bottoming. The central bank has kept rates steady at 11.25% since the last 50 bp hike in October. At the last policy meeting January 26, it warned that “Inflation remains very high and its convergence to the 3% target is still subject to risks. The Board will maintain the MPR at 11.25% until the state of the macroeconomy indicates that this process has been consolidated.” Next policy meeting is April 4 and no change is expected. The market is pricing in the start of an easing cycle over the next three months but this seems very unlikely given the bank’s cautious tone.

Peru reports February CPI Wednesday. Headline is expected at 8.80% vs. 8.66% in January. If so, it would be just shy of the cycle high of 8.81% in June 2022 and further above the 1-3% target range. At the last policy meeting February 9, the central bank delivered a dovish surprise and kept rates steady at 7.75% vs. an expected 25 bp hike. This was the first pause since it started hiking rates in August 2021, but the bank said that the pause may not mean the tightening cycle has ended. The bank said it expects inflation to start falling in March and move back to the target range by Q4. Next policy meeting is March 9 and the decision then will be data-dependent.

Colombia reports February CPI Saturday. Headline stood at 13.25% in January, the highest since March 1999 and way above the 2-4% target range. At the last policy meeting January 27, the central bank delivered a dovish surprise and hiked rates 75 bp to 12.75% vs. 100 bp expected. The vote was 5-2, with the dissents in favor of an even smaller 25 bp move. Governor Villar signaled that the end of the tightening cycle is near as “With today’s decision, monetary policy is nearing the stance required to cause inflation to slow to its 3% over the medium term.” He expects inflation has peaked and will fall strongly starting in Q2. However, Villar acknowledged that inflation uncertainty will remain high in the coming months. Next policy meeting is March 31 and a 50 bp hike to 13.25% seems likely then, with some odds of a larger 75 bp move. The swaps market is pricing in a peak policy rate between 13.25-13.5%.


Turkey reports January trade data Monday. A deficit of -$14.4 bln is expected vs. -$9.7 bln in December. If so, the 12-month total would rise to a record high -$113.6 bln. Q4 GDP data will be reported Tuesday, with growth expected at 0.7% q/q vs. -0.1% in Q3. The y/y rate is expected at 2.9% vs. 3.9% in Q3. February CPI will be reported Friday. Headline is expected at 55.70% y/y vs. 57.68% in January and core is expected at 51.60% y/y vs. 52.97% in January. The central bank just cut rates 50 bp to 8.5% last week vs. 100 bp expected and said “It has become even more important to keep financial conditions supportive to preserve the growth momentum in industrial production and the positive trend in employment after the earthquake.” However, it hinted at steady policy ahead by noting that rates are now “adequate to support the necessary recovery in the aftermath of the earthquake by maintaining price stability and financial stability.” Rebuilding efforts will provide a future boost to growth and President Erdogan will be keen to add stimulus ahead of the planned May elections. It remains to be seen whether the earthquake response will cost Erdogan at the polls.

National Bank of Hungary meets Tuesday and is expected to keep the base rate steady at 13.0%. The bank has kept the base rate unchanged since the last 125 bp hike back in late September. However, it tightened policy in mid-October when it introduced a new 1-day deposit rate at 18.0%, which is now the key policy rate. Inflation continues to run well above the 2-4% target. While the bank left rates steady at the last meeting January 25, it pledged to keep policy tight for a “prolonged period.” Deputy Governor Virag said then that “The key word is patience. We’ll certainly need to maintain the 18% interest rate level until a trend-like improvement in risk assessment.” January PPI will be reported Wednesday. With inflation running above 25%, policy remains too loose.


Hong Kong reports January trade data Monday. It’s clear from other regional data that China reopening has done little to stimulate growth and activity in its major trading partners. After the initial rush of foreign capital into China and Hong Kong after reopening was announced in December, those flows appear to be slowing and putting downward pressure on CNY and HKD. Indeed, it appears that HKD will once again test the weak end of its trading band, which will require HKMA to intervene and drive interbank rates higher. Retail sales will be reported Thursday.

Thailand reports January trade, manufacturing production, and current account data Tuesday. Manufacturing is expected at -5.60% y/y vs. -8.19% in December, while the current account surplus is expected at $1.0 bln vs. $1.1 bln in December. The economy is clearly slowing but the Bank of Thailand is expected to continue its modest tightening cycle for the foreseeable future. It hiked rates 25 bp to 1.5% in January and signaled further tightening ahead by noting “There is a risk that core inflation would remain high for longer than expected owing to a potential increase in pass-through given elevated costs. Risks of rising demand-side inflationary pressures must be monitored.” Next policy meeting is March 29 and another 25 bp hike to 1.75% is likely. The swaps market is pricing in a policy rate near 2.0% in one year, 2.25% in two years, and 2.5% in three years.

Korea reports February trade data Wednesday. Exports are expected at -7.6% y/y vs. -16.6% in January and imports are expected at 4.6% y/y vs. -2.6% in January. January IP will be reported Thursday and is expected at -9.9% y/y vs. -7.3% in December. The economy is still weakening and Bank of Korea Governor Rhee sounded a note of caution by noting that “When the situation is very foggy, it’s better to stop the car and see what will be the next move. There are huge uncertainties abroad” that include Fed policy and the impact of China reopening. It just left rates steady last week at 3.5% and Rhee noted then that there was one dissent in favor of a 25 bp hike and that five of the six board members were open to a peak policy rate of 3.75%. This was a hawkish tilt from the last meeting January 13, when three board members saw 3.5% as the terminal rate while three others saw the terminal rate at 3.75%. Next policy meeting is April 11 and while a hike then is possible, it will depend on the data. The swaps market is pricing in a peak policy rate between 3.75-4.0% over the next 6 months.

China reports official February PMIs Wednesday. Manufacturing is expected at 50.7 vs. 50.1 in January, while non-manufacturing is expected at 55.0 vs. 54.4 in January. If so, the composite should rise by around half a point from 52.9 in January. Caixin also reports its manufacturing PMI Wednesday and is expected at 51.3 vs. 49.2 in January. Caixin reports its services and composite PMIs Friday, with services expected at 54.8 vs. 52.9 in January. The economy should continue to pick up from reopening but the benefits to China’s major trading partners has so far been very limited.

Indonesia reports February CPI Wednesday. Headline CPI rose 5.28% y/y in January, the lowest since August 2022 but still above the 2-4% target range. The central bank kept rates steady at 5.75% earlier this month and saw both headline and core inflation returning to the target range in H2. The tightening cycle may have ended, as Governor Warjiyo said that there’s “no need for any more hikes.” He added that both headline and core inflation are falling faster than initially expected. Next policy meeting is March 16. Whether rate hikes have ended will of course depend on the data but as we have seen elsewhere, the global fight against inflation has turned increasingly difficult.

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