EM FX was mostly softer last week as the dollar mounted a modest recovery on the back of firm U.S. data and hawkish Fed communications. HUF, INR, and TRY outperformed while CLP, ZAR, and THB underperformed. We believe data this week will underscore the Fed’s hawkish stance, which should help the dollar and keep EM FX under pressure.
AMERICAS
Brazil reports mid-May IPCA inflation Tuesday. Headline is expected at 3.73% y/y vs. 3.77% in mid-April. If so, inflation would move closer to the mid-point of its 1.5-4.5% target range. At the last meeting May 8, COPOM cut rates 25 bp to 10.5% by a 5-4 vote, with the dissents in favor of a larger 50 bp cut. No forward guidance was given, and the bank expressed concern about loose fiscal policy. Next meeting is June 19, and no change is expected as markets believe the policy rate has bottomed at 10.5%. Central government budget data for April will be reported sometime this week. A primary surplus of BRL12.8 bln is expected vs. a primary deficit of -BRL1.5 bln in March. Consolidated budget data will be reported Friday.
Banco de Mexico releases its quarterly inflation report Wednesday. At its last policy meeting May 9, the bank left rates unchanged at 11.0% and raised its inflation forecasts. It now sees end-2024 inflation at 4.0% vs. 3.6% previously and end-2025 at 3.0% vs. 3.1% previously. Since that meeting, inflation picked up in mid-May and so we expect this inflation report to maintain a hawkish tone. Next meeting is June 27, and the decision will depend on how inflation behaves in the coming weeks. The swaps market is pricing in 50 bp of easing over the next six months followed by another 50 bp over the subsequent six months.
Mexico elections will be held this coming Sunday. Polls show Morena candidate Claudia Scheinbaum well ahead of opposition candidate Xochitl Galvez in the race to replace President Andres Manuel Lopez Obrador. All 500 seats in the lower house will be contested, as well as all 128 seats in the Senate. With polls consistently showing Scheinbaum with a huge lead, markets have largely priced in a continuation of the policies of her long-time mentor and ally AMLO.
EUROPE/MIDDLE EAST/AFRICA
Bank of Israel meets Monday and is expected to keep rates steady at 4.5%. At the last meeting April 8, Bank of Israel kept rates steady at 4.5% and saw the policy rate at 3.75% in Q1 2025. Governor Yaron said, “In view of recent developments, which indicate a substantial increase in the geopolitical uncertainty, the Monetary Committee decided to side with caution and kept the interest rate unchanged.” The Governor will likely stick to that message this week, as inflation has come in higher than expected and accelerated to 2.8% in April, the highest since December. The swaps market is pricing in steady rates over the next six months followed by 25 bp of easing over the subsequent six months.
South African Reserve Bank meets Thursday and is expected to keep rates steady at 8.25%. At the last meeting March 27, the bank kept rates steady at 8.25% and Governor Kganyago said “Given extra inflation pressure, headline now reaches the target midpoint only at the end of 2025, later than previously expected. As a result, the policy rate in our baseline forecast also starts normalizing later.” Since then, inflation has slowed modestly to 5.2% y/y in April but remains near the top of the 3-6% target range. The market sees some odds of a rate over the next six months, but we believe rates will remain steady until early 2025.
South Africa elections will be held Wednesday. The results are expected to be announced three days after voting. Polls show the ruling African National Congress (ANC) is projected to lose its absolute majority but will probably have enough support to lead a coalition government with other parties. Over the long term, the trend in ZAR will be guided by how the next government tackles rising unemployment, stagnant growth, rampant corruption and deteriorating public infrastructure.
Poland reports May CPI Friday. Headline is expected at 2.9% y/y vs. 2.4% in April. If so, it would be the highest since January but still within the 1.5-3.5% target range. At the last policy meeting May 9, the bank left rates steady at 5.75%. Governor Glapinski said he does not see any rate cuts this year and said the bank sees inflation “significantly” above 5% by year-end. Next meeting is June 5, and no change is expected then. The swaps market is pricing in 25 bp of easing over the next 12 months.
ASIA
China reports official May PMIs Friday. Manufacturing is expected to remain steady at 50.4 while non-manufacturing is expected to rise three ticks to 51.5. If so, the composite is likely to rise a couple of ticks from 51.7 in April However, we cannot get excited about what we view as a modest cyclical recovery. Structurally, the economy remains constrained by a huge debt overhang and a burst property bubble.
Korea reports April IP Friday. IP is expected at 3.8% y/y vs. 0.7% in March. May trade data will be reported Saturday local time. Exports are expected at 14.8% y/y vs. 13.8% in April, while imports are expected at 1.7% y/y vs. 5.4% in April. If so, export growth would be the strongest since January but flattered by low base effects from 2023. While the economy is in modest recovery, the Bank of Korea is seen keeping rates steady over the next six months, followed by the start of a modest easing cycle over the subsequent six months.
