EM FX was mostly firmer last week due to broad dollar weakness. COP, CZK, and ZAR outperformed while KRW, PEN, and TRY underperformed. The greenback ended the week on a firmer note after stronger than expected jobs data led markets to pare back Fed easing expectations. However, this week should bring much higher tariffs that are likely to weigh on the US economic outlook, which in turn should weigh on the dollar and help boost EM FX.
AMERICAS
Colombia reports June CPI data Monday. Headline is expected at 4.91% y/y vs. 5.05% in May, while core is expected at 4.97% y/y vs. 5.13% in May. If so, headline would be the lowest since October 2021 but would remain above the 2-4% target range. At the last meeting June 27, the central bank kept rates steady at 9.25% and warned that “The projected increase in the fiscal deficit for 2025 and beyond poses a challenge to the sustainability of public finances and reduces the room for monetary policy easing.” The bank noted that “Global financial conditions remain tight amid heightened global geopolitical tensions.” Next meeting is July 31 and another hold is likely if the fiscal outlook does not improve. The swaps market is pricing in 75 bp of total easing over the next 12 months that would see the policy bottom near 8.5%.
Chile reports June CPI data Tuesday. Headline is expected to remain steady at 4.4% y/y. if so, it would remain above the 2-4% target range. At the last meeting June 17, the central bank kept rates steady at 5.0% the bank kept rates steady at 5.0% for the fourth straight meeting. However, it signaled further easing ahead as it said that if its baseline scenario materializes, the policy rate “will be approaching its range of neutral values” in the coming quarters. The neutral rate has been estimated to between 3.5-4.5%. Next meeting is July 29 and another hold is likely. The swaps market is pricing in 75-100 bp of total easing over the next 12 months that would see the policy rate bottom between 4.00-4.25%.
Mexico reports June CPI data Wednesday. Headline is expected at 4.30% y/y vs. 4.42% in May, while core is expected at 4.22% y/y vs. 4.06% in May. If so, headline would decelerate for the first time since January but would remain above the 2-4% target range. Banxico minutes will be released Thursday. At that meeting June 26, the bank cut rates 50 bp to 8.0% but noted that “Looking ahead, the Board will assess further adjustments to the reference rate.” It removed the previous references to additional cuts of “similar magnitudes.” Of note, Deputy Governor Heath dissented in favor of steady rates. The swaps market is pricing in 50 bp of further easing that would see the policy rate bottom near 7.5%. Next meeting is August 7 and we believe it may slow the pace of easing to 25 bp.
Brazil reports June IPCA inflation Thursday. Headline is expected at 5.30% y/y vs. 5.32% in May. If so, it would decelerate for the second straight month but would remain above the 1.5-4.5% target range. At the last meeting June 18, the central bank hiked rates 25 bp to 15.0% but signaled that the tightening cycle has likely ended. The bank said “If the expected scenario materializes, the Committee foresees an interruption of the rate hiking cycle to examine its yet-to-be-seen cumulative impacts.” The bank added that it will “evaluate whether the current interest rate level, assuming it’s stable for a very prolonged period, will be enough to ensure the convergence of inflation to the target.” Next meeting is July 30 and no change is expected. The swaps market is pricing in steady rates over the next six months followed by 100 bp of easing over the subsequent six months.
Peru central bank meets Thursday and is expected to keep rates steady at 4.5%. At the last meeting June 12, the bank kept rates steady at 4.5% and noted that “Most indicators and expectations remained in the optimistic range, in a context where economic activity is hovering around its potential level.” However, it warned that “The outlook for global activity has deteriorated as a result of restrictive measures on foreign trade.” Bloomberg consensus sees only one 25 bp cut in H2.
EUROPE/MIDDLE EAST/AFRICA
Bank of Israel meets Monday and is expected to keep rates steady at 4.5%. At the last meeting May 26, the bank kept rates steady at 4.5% and warned that “Forecasters project that the convergence of inflation to the target range will be later than their assessments prior to the publication of the April CPI.” At the April meeting, bank researchers saw the policy rate at 4.0% in 12 months vs. 4.0-4.25% at the January meeting. Updates to the expected rate path will come at Monday’s meeting. The swaps market is pricing in 100 bp of total easing over the next 12 months that would see the policy rate bottom near 3.5%.
Hungary reports June CPI data Tuesday. Headline is expected at 4.6% y/y vs. 4.4% in May. Central bank minutes will be released Wednesday. At that June 24 meeting, the bank kept rates steady at 6.5% and Governor Varga warned that “cautious, patient” and “tight” monetary policy was needed due to upside inflation risks. Inflation forecasts were raised to 4.7% in 2025, 3.7% in 2026, and 3.0% in 2027 even as growth forecasts were cut to 0.8% in 2025, 2.8% in 2026, and 3.2% in 2027. Next meeting is July 22 and another hold seems likely. However, the swaps market is pricing in 50 bp of easing over the next 12 months.
ASIA
Thailand reports June CPI data Monday. Headline is expected at -0.10% y/y vs. -0.57% in May, while core is expected at 1.10% y/y vs. 1.09% in May. If so, headline would remain well below the 1-3% target range. At the last meeting June 25, Bank of Thailand kept rates steady at 1.75% and said the pause was due to “high uncertainty and limited policy space” but stressed that it stands ready to adjust policy in the future as needed. The bank raised its 2025 growth forecast slightly to 2.3% on a more constructive external backdrop. The BOT assumed an 18% tariff rate will be applied to Thailand vs. the 36% reciprocal rate announce in April as well as 10% for other countries. This seems way too optimistic to us. Assistant Governor Sakkapop “We have limited ammunition so timing is important. We need to see when will be the most effective timing to cut the rate.” Next meeting is August 13. The swaps market is pricing in 50-75 bp of easing over the next 12 months that would see the policy rate bottom between 1.00-1.25%.
China reports June money and loan data sometime this week. CPI and PPI data will be reported Wednesday. CPI is expected to remain steady at -0.1% y/y, while PPI is expected at -3.1% y/y vs. -3.3% in May. Overall, China’s economy is struggling to escape a deflationary spiral in large part because consumption spending is too weak. China's consumption-to-GDP ratio is very low at round 40%, due to high household savings, low household income levels, and high levels of household debt.
Bank Negara meets Wednesday and is expected to keep rates steady at 3.0%. At the last meeting May 8, the bank delivered a dovish hold as it cut reserve requirements to 2% vs. 1% previously. This released around MYR19 bln of liquidity into the system. The bank noted that “the monetary policy stance is consistent with the current assessment of inflation and growth prospects. Recognizing that there are downside risks in the economic environment, the MPC remains vigilant to ongoing developments to inform the assessment on the domestic inflation and growth outlook.” The swaps market is pricing in 50 bp of easing over the next 12 months that would see the policy rate bottom near 2.5%.
Bank of Korea meets Thursday and is expected to keep rates steady at 2.5%. At the last meeting May 29, the bank cut rates 25 bp to 2.5% and noted that “The domestic economy is expected to see a marked slowdown in growth this year, even as inflation remains on a stable trajectory. Uncertainty surrounding the future growth path also remains elevated.” Governor Rhee said the bank would consider more rate cuts if the 2025 growth outlook falls more, adding that four of the six members of the board were open to a cut over the next three months. Rhee also said there is a chance of larger cuts in the future. The swaps market is pricing in 25 bp of total easing over the next 12 months that would see the policy rate bottom near 2.25%.
