EM FX was mostly firmer last week as the dollar remained under broad-based pressure. HUF, ZAR, and MYR outperformed while ARS, CLP, and TRY underperformed. Risk on sentiment is pervasive as markets believe the end of the Fed tightening cycle is near. We believe this is premature but for now, we cannot stand in the way of this narrative and so further near-term dollar weakness seems likely. Eventually, deteriorating macro conditions in the rest of the world should boost the greenback’s attractiveness but we are not there yet.
Brazil reports May GDP proxy Monday. Growth is expected at 4.00% y/y vs. 3.31% in April. With growth slowing, expectations for an easing cycle have solidified and the market is pricing in a 25 bp cut at the next COPOM meeting August 2. Looking ahead, the market is pricing in 75 bp of easing over the next three months followed by another 125 bp over the subsequent three months.
Colombia reports May GDP proxy Tuesday. Growth is expected at 0.6% y/y vs. -0.8% in April. With growth slowing, expectations for an easing cycle have been moved forward. The market is pricing in 25 bp of easing over the next three months followed by another 100 bp over the subsequent three months.
Poland reports June core CPI Monday. Core inflation is expected at 11.1% y/y vs. 11.5% in May. Industrial and construction output and PPI will be reported Thursday. IP is expected at -1.6% y/y vs. -3.2% in May, construction is expected at 1.0% y/y vs. -0.7% in May, and PPI is expected at 1.0% y/y vs. 3.1% in May. Real retail sales will be reported Friday and are expected at -5.0% y/y vs. -6.8% in May. The economy is slowing and so the market is pricing in the start of an easing cycle soon despite still-high inflation. The market is pricing in 25 bp of easing over the next three months followed by another 75 bp over the subsequent three months.
Turkey reports central government budget balance Monday. The central bank meets Thursday and is expected to hike rates 325 bp to 18.25%. However, market expectations are all over the place. Of the 16 analysts polled by Bloomberg, 1 sees 200 bp, 3 see 250 bp, 4 see 300 bp, 1 sees 350 bp, 4 see 400 bp, and 3 see 500 bp. At the last meeting June 22, the bank delivered a dovish surprise and hiked rates 650 bp to 15.0% vs. 1150 bp expected. Since then, the lira has weakened another 10% before stabilizing from likely covert official support. The market is pricing in 1100 bp of tightening over the next three months followed by another 250 bp over the subsequent three months that would see the policy rate peak near 28.50%. With inflation running near 40%, this would not be enough to stabilize the lira.
South Africa reports June CPI and May retail sales Wednesday. Headline inflation is expected at 5.5% y/y vs. 6.3% in May, while core is expected at 5.1% y/y vs. 5.2% in May. If so, headline would be the lowest since November 2021 and back within the 3-6% target range for the first time since April 2022. Elsewhere, sales are expected at -1.1% y/y vs. -1.6% in April. The South African Reserve Bank meets Thursday and is expected to hike rates 25 bp to 8.5%. A few of the analysts polled by Bloomberg see steady rates. At the last meeting May 25, the bank hiked 50 bp to 8.25% and raised its inflation forecasts whilst warning of further rand weakness ahead. Looking ahead, the market is pricing in steady rates over the next 12 months followed by the start of an easing cycle over the subsequent 12 months.
People’s Bank of China is expected to keep its key 1-year MLF rate steady at 2.65% Monday. China also reports Q2 GDP as well as June IP and retail sales Monday. GDP is expected at 0.8% q/q vs. 2.2% in Q1, while the y/y rate is expected at 7.1% vs. 4.5% in Q1. IP is expected at 2.5% y/y vs. 3.5% in May while sales are expected at 3.3% y/y vs. 12.7% in May. The economy is clearly slowing and so there will be pressure on policymakers to add more stimulus. China’s commercial banks set their key 1- and 5-year Loan Prime Rates Thursday and are expected to be kept steady at 3.55% and 4.20%, respectively.
Taiwan reports June export orders Thursday. Orders are expected at -19.5% y/y vs. -17.6% in May. If so, it would be the eighth straight month of double digit contraction and tenth straight of overall contraction. Elsewhere, Korea reports trade data for the first twenty days of July Friday. Export growth improved in June but this will be difficult to sustain given sluggish regional growth and activity.