Despite the risk off sentiment last week, EM FX was mostly firmer. BRL, COP, and CLP were the top performers while TRY, ARS, and IDR were the worst. On paper, RUB was the best performer last week but until foreign investors are allowed to sell their Russian investments and repatriate the funds, the quoted exchange rate is meaningless. We continue to believe that last week’s dollar weakness was corrective in nature and not a trend change and so we look for a recovery in the greenback this week. The backdrop for EM remains difficult as global growth continues to slow as global liquidity continues to tighten.
Mexico reports mid-May CPI data Tuesday. Headline is expected at 7.60% y/y vs. 7.72% in mid-April. If so, it would be the first deceleration since January but still well above the 2-4% target range. April trade, March GDP proxy, and Q1 current account data will all be reported Wednesday. Banco de Mexico releases its minutes Thursday. At the May 12 meeting, it hiked the expected 50 bp to 7.0%. However, it hinted at larger hikes ahead as it noted “Given the growing complexity in the environment for inflation and its expectations, taking more forceful measures to attain the inflation target may be considered.” The vote was 4-1, with Deputy Governor Espinosa dissenting in favor of a 75 bp hike. Deputy Governor Heath may have joined her as he said he was surprised that so few analysts are looking for 75 bp at the next policy meeting June 23. If inflation does slow, another 50 bp hike to 7.5% seems likely.
Brazil reports mid-May IPCA inflation Tuesday. Inflation is expected at 12.05% y/y vs. 12.03% in mid-April. If so, it would remain well above the 2-5% target range. COPOM hiked the expected 100 bp to 12.75% at the last meeting May 4 and hinted that the pace would continue to slow. Next meeting is June 15 and the CDI market is pricing in a 50 bp hike to 13.25% followed by a final 25 bp hike to 13.5% at the August 3 meeting. This lines up with the swaps market pricing as well. The real has taken advantage of recent dollar softness and is trading at the strongest level since late April. For USD/BRL, a break below 4.8375 would set up a test of the April 20 low near 4.6095.
Poland reports April real retail sales and construction output Monday. Sales are expected at 16.2% y/y vs. 9.6% in March, while construction is expected at 18.7% y/y vs. 27.6% in March. While the economy appears to be slowing modestly, more needs to be done to address inflation. Headline inflation was 12.4% y/y in April, the highest since December 1997 and further above the 1.5-3.5% target range. The central bank delivered a dovish surprise at its last meeting May 5 by hiking rates 75 bp to 5.25% vs. 100 bp expected. Next meeting is June 8 and another 75 bp hike to 6.0% seems likely but with risks of a hawkish surprise. The swaps market sees the policy rate peaking near 6.25% over the next 12 months but we see upside risks.
Bank of Israel meets Monday and is expected to hike rates 25 bp to 0.60%. A handful of analysts look for a larger 40 bp move. At the last meeting April 11, the bank delivered a hawkish surprise by starting the tightening cycle with a 25 bp hike to 0.35% vs. 15 bp expected. It noted that “The pace of raising the interest rate will be determined in accordance with activity data and the development of inflation, in order to continue supporting the attainment of the policy goals.” The bank saw the policy rate at 1.5% in Q1 23. Since then, inflation accelerated to 4.0% y/y in April, the highest since June 2011 and further above the 1-3% target range. Swaps market sees the policy rate peaking near 2.25% in the next 24 months but we see upside risks.
Turkey central bank meets Thursday and is expected to keep rates steady at 14.0%. Despite inflation accelerating to 70% y/y in April, the highest since February 2002, the bank has kept rates steady since its last 100 bp cut back in December. The country is nearing a moment of reckoning. After the recent effort to attract foreign investors fell flat, it appears foreign reserves are being rapidly depleted. The most recent central bank figures show a $4.8 bln decline last week in gross reserves to $61.2 bln, the lowest since last July. The twin deficits are growing and need to be financed by offering higher rates and so we believe the central bank will eventually be forced to hike in the coming months. Until that happens, USD/TRY is likely to drift higher and test the December high near 18.3635.
Korea reports trade data for the first 20 days of May Monday. Recent data suggest the regional slowdown in trade and activity continues and that should be reflected in this trade data. Bank of Korea meets Thursday and is expected to hike rates 25 bp to 1.75%. Since it began the tightening cycle back in August 2021, it has hiked roughly every meeting. It just hiked 25 bp at the April 14 meeting but new Governor Rhee has taken a hawkish stance and so is likely to deliver a hike at his first meeting. Headline inflation accelerated to 4.8% y/y in April, the highest since October 2008 and further above the 2% target. The swaps market sees the policy rate peaking near 3.25% over the next 12 months.
Singapore reports April CPI data Monday. Headline inflation is expected to rise a tick to 5.5% y/y, while core is expected at 3.4% y/y vs. 2.9% in March. While the MAS does not have an explicit inflation target, rising price pressures has led it to tighten policy at its last three meetings, the last one in April. Whether it tightens again at the next meeting in October will depend on how the data are coming in and how badly the mainland slowdown impacts the local economy. April IP will be reported Thursday and is expected at 3.7% y/y vs. 3.4% in March.
Bank Indonesia meets Tuesday and is expected to keep rates steady at 3.50%. However, nearly a third of the 20 analysts polled by Bloomberg look for a 25 bp hike to start the tightening cycle. Headline inflation accelerated to 3.47% y/y in April, the highest since December 2017 and in the top half of the 2-4% target range. If there is no liftoff this week, then we think it is very likely at the next meeting June 23. At the last policy meeting April 19, the bank delivered a dovish hold as Governor Warjiyo said “The decision is consistent with the need to maintain exchange rate stability and control inflation, coupled with efforts to revive economic growth despite a build-up of external pressure. We will very carefully consider our further moves to maintain stability and support economic growth.”
Malaysia reports April CPI Wednesday. Headline inflation is expected to pick up a tick to 2.3% y/y. While Bank Negara does not have an explicit inflation target, it delivered a hawkish surprise May 11 by starting the tightening cycle with a 25 bp hike to 2.0%. It noted that “Inflationary pressures have increased sharply due to a rise in commodity prices, strained supply chains and strong demand conditions, particularly in the US.” We do not expect an aggressive tightening cycle ahead and whether there is another hike at the next meeting July 6 will depend in large part on how the economy is faring.