EM FX was mostly weaker last week as the dollar saw a broad-based rally despite the ongoing tariff uncertainty. PEN, TWD, and PLN outperformed while BRL, KRW, and MXN underperformed. We believe the dollar gains were exaggerated by skewed positioning, with weakness likely to resume this week as the dust settles. Key data this week should show that the U.S. economy is feeling the impact of the tariffs and tariff uncertainty. However, this backdrop is not supportive of risk assets and so we remain cautious on EM FX.
AMERICAS
Chile reports May CPI data Friday. Headline is expected to fall a tick to 4.4% y/y. If so, it would be the lowest since November but would remain above the 2-4% target range. At the last meeting April 29, the central bank kept rates steady at 5.0% and said “Changes in global trade policy have deteriorated the prospects for global growth, while increasing uncertainty about its future evolution. The magnitude and timing of these effects on the local economy are still uncertain.” The swaps market is pricing in nearly 100 bp of easing over the next 12 months that would see the policy rate bottom near 4.0%.
EUROPE/MIDDLE EAST/AFRICA
Turkey reports May CPI data Tuesday. Headline is expected at 36.00% y/y vs. 37.86% in April, while core is expected at 35.80% y/y vs. 37.12% in April. If so, headline would be the lowest since December 2021. At the last meeting April 17, the central bank hiked rates 350 bp to 46.0% and said that “Monetary policy stance will be tightened in case a significant and persistent deterioration in inflation is foreseen.” Next meeting is June 19 and with the lira still under pressure, we lean towards a hold but acknowledge risks of a dovish surprise. However, the decision then will depend on both internal and external developments over the next couple of weeks. The swaps market is pricing in 11 percentage points of total easing over the next six months.
Czech Republic reports May CPI data Wednesday. Headline is expected to pick up two ticks to 2.0%. If so, it would be right at the center of the 1-3% target range. At the last meeting May 7, the central bank cut rates 25 bp to 3.5%. However, it was a hawkish cut as Governor Michl said “We don’t have agreement for now whether this was the last cut or not. What we do agree on is that the room for lowering rates further is limited, and that further cuts are preconditioned by a decline in inflationary risks in the domestic economy.” Despite the hawkish stance, the swaps market is pricing in 50 bp of easing over the next six months.
National Bank of Poland meets Wednesday and is expected to keep rates steady at 5.25%. Minutes of its May 7 meeting will be published Friday. At that meeting, the bank cut rates 50 bp to 5.25% and pushed back on expectations of an aggressive easing cycle. Governor Glapinski expressed doubts about a cut next month, adding that some MPC members see autumn data as key for more easing. Looking ahead, the swaps market is pricing in 125 bp of total easing over the next 12 months, followed by another 50 bp over the subsequent 12 months that would see the policy rate bottom near 3.5%.
Poland holds its presidential runoff next Sunday. The nationalist Law & Justice party leader Karol Nawrocki will face off against Warsaw Mayor Rafal Trzaskowski, a centrist and pro-European candidate aligned with Prime Minister Tusk’s Civic Platform. The latest polls point to a tight race. While the presidency in Poland is largely ceremonial, the election outcome will either support or hinder the Tusk’s government EU-aligned reform agenda. The president has veto power and Tusk does not have three-fifths majority in the Sejm (lower house) to override a veto. A Nawrocki win would extend the legislative paralysis and is a headwind for PLN. Conversely, a Trzaskowski victory would likely facilitate the Tusk’s government push for closer EU ties and turbocharge PLN.
ASIA
Indonesia reports May CPI data Monday. Headline is expected at 1.87% y/y vs. 1.95% in April, while core is expected to remain steady at 2.50% y/y. If so, headline would remain below the 2-4% target range. At the last meeting May 21, Bank Indonesia cut rates 25 bp to 5.5%. It lowered its 2025 GDP growth forecast 0.1 ppt to 4.6-5.4% and expects inflation to remain low and stay within its 1.5-3.5% target range in both 2025 and 2026. IDR strength will be key in giving the bank confidence to ease further. Of note, Bloomberg consensus does not see the next 25 bp cut until 2026.
Caixin reports May PMIs this week. Manufacturing will be reported Tuesday and is expected at 50.7 vs. 50.4 in April. Services and composite will be reported Thursday, with services expected at 51.0 vs. 50.7 in April. Over the weekend, official May PMIs came in mixed, with manufacturing higher and non-manufacturing lower. As a result, the composite PMI rose two ticks to 50.4.
Korea reports May CPI and Q1 GDP data Wednesday. Both headline and core are expected to remain steady at 2.1%. Bank of Korea just cut rates 25 bp last week 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 25-50 bp of total easing over the next 12 months that would see the policy rate bottom between 2.0-2.25%.
Philippines reports May CPI data Thursday. Headline is expected to fall a tick to 1.3% y/y. At the last meeting April 10, the central bank cut rates 25 bp to 5.5% and Governor Remolona said “Like the rest of the world, we’re looking at slower growth, but unlike the rest of the world, we’re looking at lower inflation. On balance, the more manageable inflation outlook and the risks to growth allow for a shift toward a more accommodative monetary policy stance.” He added that “The BSP will continue to take a measured approach in deciding on further monetary easing.” The swaps market is pricing in 125 bp of total easing over the next 12 months, which seems a tad overdone.
Thailand reports May CPI data Thursday. Headline is expected at -0.75% y/y vs. -0.22% in April, while core is expected at 0.94% y/y vs. 0.98% in April. At the last meeting April 30, Bank of Thailand cut rates 25 bp to 1.75% and said “The US trade policies and potential retaliations from major economies will cause significant changes in the global economic, financial, and trade landscape. The Thai economy is projected to expand at a slower pace than anticipated, with more downside risks due to uncertainty in major economies’ trade policies and a decline in the number of tourists.” Assistant Governor Sakkapop added “Monetary policy needs to be more accommodative. We have shifted our policy stance to easing.” Given this dovish guidance, the swaps market is pricing in 50 bp of easing over the next 12 months that would see the policy rate bottom near 1.25%.
Reserve Bank of India meets Friday and is expected to cut rates 25 bp to 5.75%. At the last meeting April 9, the bank cut rates 25 bp to 6.0%. The decision was unanimous. Moreover, RBI changed the policy stance from neutral to accommodative, implying more cuts are in the pipeline. Indeed, Governor Malhotra said “Going forward, absent any shocks, the MPC is considering only two options: status quo or rate cut. The domestic growth-inflation trajectory demands monetary policy to be growth-supportive, while being watchful on the inflation front.” The swaps market is pricing in 50 bp of further easing over the next 12 months that would see the policy rate bottom near 5.50%.
