EM Preview for the Week of January 9, 2022

January 09, 2022

EM FX was mixed last week despite broad-based dollar gains vs. the majors. CLP, HUF, and ZAR were the best performers, while TRY, RUB, and KRW were the worst. We believe the dollar will recover from Friday’s modest selloff, as the Fed moves quickly to normalize policy in the face of rising inflation and a tightening labor market. A fourth hike this year is getting priced in, as is a terminal Fed Funds rate closer to 2%. U.S. yields should continue to march higher and this is likely to put downward pressure on risk assets such as EM.


Mexico reports November IP Tuesday. It is expected to rise 0.5% m/m vs. 0.6% in October. Banxico MPC members Heath and Esquivel had a very public debate about inflation over Twitter, something that is very unusual for the typically old-fashioned central. The former is concerned about rising core inflation, while the latter feels that inflation peaked in November and will continue to slow in the coming months. Of note, the decision to hike 50 bp in December was 4-1, with Esquivel dissenting in favor of a 25 bp move. New Governor Rodriguez takes over at a difficult time for the economy. Her first meeting will be February 10 and it’s not clear yet whether the bank will deliver another 50 bp move or not. Swaps market sees the policy rate peaking at 7.75% by year-end.

Brazil reports December IPCA inflation Tuesday. Headline inflation is expected at 9.97% y/y vs. 10.74% in November. If so, it would be the first deceleration since May 2020 but still far above the 2-5% target range for this year. Next COPOM meeting is February 2 and another 150 bp hike to 10.75% is expected. Swaps market sees the policy rate peaking at 12.75% by mid-year followed by a modest easing cycle starting in H2. November retail sales will be reported Friday and expected at -0.4% m/m vs. -0.1% in October. Economic data have been weakening recently as the economy buckles under the weight of aggressive tightening by the central bank.


Hungary reports November trade data Monday. December CPI will be reported Friday, with headline inflation expected at 7.2% y/y vs. 7.4% in November. If so, it would be the first deceleration since July but still well above the 2-4% target range. Last week, the central bank left the one-week deposit rate steady for the first time in eight weeks and is expected to do the same this Thursday. We do not think the inflation battle is over yet as the central bank remains behind the curve. Next policy meeting is January 25 and another 30 bp hike in the benchmark rate to 2.7% is likely.

Turkey reports November current account data Tuesday. A deficit of -$2.5 bln is expected. If so, the 12-month total would narrow to -$14.4 bln, the lowest since June 2020. IP will be reported Thursday and is expected at 0.5% m/m vs. 0.6% in October. Of note, the budget deficit was already rising before crisis and is likely to expand further as outlays will likely balloon due to rising civil service pay as well as the government’s plan to assume of currency risk for lira depositors. Borrowing costs will have to rise in order to finance this borrowing, something policymakers are trying to avoid as the central bank revived its bond-guying plan last week. Until a monetary policy anchor is established, we believe the government’s efforts to avoid a crisis are doomed to failure.

Czech Republic reports December CPI Wednesday. Headline inflation is expected at 6.6% y/y vs. 6.0% in November. If so, it would be the highest since September 2008 and further above the 1-3% target range. The bank delivered a hawkish surprise last month with a 100 bp hike to 3.75% and said it will continue hiking rates. Next policy meeting is February 3 and another large hike is expected. Swaps market sees the policy rate peaking at 4.75% in H1, followed by modest easing in H2. November retail sales will be reported Thursday and are expected to rise 6.4% y/y vs. 0.3% in October.

Poland reports November trade and current account data Thursday. National Bank of Poland releases minutes Friday. At the January 4 meeting, the bank hiked rates 50 bp to 2.25%, as expected. Governor Glapinski said the bank still has room to hike rates and will likely stick to 50 bp moves. However, he showed his dovish colors when he said it was “safe” for rates to rise to 3%, later adding that even 4% could be safe if growth remains strong. Next policy meeting is February 8 and another 50 bp hike to 2.75% is likely. Swaps market is pricing in 175 bp of further tightening over the course of 2022 that would take the policy rate to 4.0%

Israel reports December trade data Thursday. December CPI will be reported Friday, with headline inflation expected at 2.5% y/y vs. 2.4% in November. If so, it would match the cycle high from September but remain within the 1-3% target range. Next policy meeting is February 21 and rates are likely to remain at 0.10%. At the policy meeting last week, the bank delivered a dovish hold. It said accommodative policy would be maintained for a “prolonged” time, adding that there is no concern about an “inflationary outbreak” as it has stabilized around the midpoint of its target range. Meanwhile, the bank bought $34.8 bln of foreign currency last year vs. $30 bln planned and said it would “continue to act in the foreign exchange market at its discretion and taking economic activity into account.”


China reports December new loan and money data sometime this week. Aggregate financing is expected at CNY2.4 trln vs. CNY2.6 trln in November, while new loans are expected at CNY1.25 trln vs. CNY1.27 trln in November. CPI and PPI will be reported Wednesday. CPI is expected at 1.7% y/y vs. 2.3% in November, while PPI is expected at 11.3% y/y vs. 12.9% in November. Price pressures appear to be easing and so policymakers are likely to continue boosting the economy with further monetary and fiscal stimulus this year. Trade data will be reported Friday, with exports expected at 20.0% y/y vs. 22.0% in November and imports expected at 27.8% y/y vs. 31.7% in November.

Korea reports November current account data Tuesday. Bank of Korea meets Friday and is expected to hike rates 25 bp to 1.25%. A handful of analysts see no hike. At the last meeting in November, the bank hiked 25 bp and Governor Lee flagged more hikes ahead, noting “With this hike, the policy rate is still below the neutral level, the real rate is still negative, and there’s plenty of liquidity. It’s natural that we normalize the rate, which has been excessively low, as the economy recovers.” CPI rose 3.7% y/y in December, down a tick from the November peak but nearly double the 2% target. Swaps market is pricing in 100 bp of tightening in 2022.

India reports December CPI and November IP Wednesday. CPI is expected at 5.80% y/y vs. 4.91% in November, while IP is expected at 2.8% y/y vs. 3.2% in October. If so, inflation would be the highest since June and nearing the top of the 3-6% target range. WPI will be reported Friday and is expected to rise 13.50% y/y vs. 14.23% in November. If so, it would be the first deceleration since July. Still, price pressures remain high and the RBI is expected to start a tightening cycle this year. Next policy meeting is February 8 and swaps market is pricing in liftoff then with a 50 bp hike to 4.5%. A total of 150 bp in tightening is seen over the course of 2022, followed by another 75-100 bp in 2023.

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