EM FX was mostly softer last week as the dollar mounted a broad-based recovery on the back of strong U.S. data. MXN and COP outperformed and were able to post gains against USD, while KRW, HUF, and PLN underperformed and saw large losses. Data last week confirmed what we already knew; that is, the U.S. economy continues to outperform and the Fed is therefore unlikely to slash rates as much as the market expects. While those expectations have adjusted, more needs to be done. This week brings key U.S. inflation data that should help extend the dollar recovery and keep downward pressure on EM FX.
AMERICAS
Colombia reports September CPI data Monday. Headline is expected at 5.84% y/y vs. 6.12% in August, while core is expected at 6.54% y/y vs. 6.78% in August. If so, headline would be the lowest since December 2021 but still above the 2-4% target range. At the last meeting September 30, the central bank cut rates 50 bp to 10.25% and noted that “Today’s decision will continue to support the recovery of economic growth and maintains the necessary prudence given the risks that remain over the behavior of inflation.” The vote was 4-3, with the three dissents in favor of a larger 75 bp cut. This was more dovish than the 5-2 vote to cut 50 bp July 31. Next meeting is October 31 and we expect another 50 bp cut to 9.75%. The market is pricing in 300 bp of total easing over the next 12 months that would see the policy rate bottom near 7.25%.
Chile reports September CPI data Tuesday. Headline is expected at 4.4% y/y vs. 4.7% in August. If so, it would be the first deceleration since August but would remain above the 2-4% target range. At the last meeting September 3, the central bank cut rates 25 bp to 5.5% and warned that both bank credit and consumer spending were weak. The bank added that if the economy meets its forecasts, “the reduction of the key rate toward its neutral level will be somewhat faster than expected in June.” Next meeting is October 17 and another 25 bp cut to 5.25% is expected. The swaps market is pricing in 125 bp of total easing over the next 12 months that would see the policy rate bottom near 4.25%..
Brazil reports September IPCA inflation Wednesday. Headline is expected at 4.45% y/y vs. 4.24% in August. If so, it would reverse the August drop and move back near the top of the 1.5-4.5% target range. At the last meeting September 18, COPOM hiked rates 25 bp to 10.75% and struck a rather hawkish tone. Next COPOM meeting is November 6 and a 50 bp hike to 11.25% is expected. The swaps market is pricing in 250 bp of total tightening over the next 12 months that would see the policy rate peak near 13.25%. August retail sales will be reported Thursday and are expected at 4.1% y/y vs. 4.4% in July.
Mexico reports September CPI data Wednesday. Headline is expected at 4.61% y/y vs. 4.99% in August, while core is expected at 3.94% y/y vs. 4.00% in August. If so, headline would be the lowest since March and would move closer to the 2-4% target range. Banco de Mexico minutes will be released Thursday. At that September 26 meeting, the bank cut rates 25 bp to 10.5% and signaled further easing will be discussed. Next meeting is November 14 and another 25 bp cut to 10.25% is expected. The swaps market is pricing in 175-200 bp of total easing over the next 12 months. August IP will be reported Friday and is expected at 0.4% y/y vs. 2.1% in July.
Peru central bank meets Thursday and is expected to cut rates 25 bp to 5.0%. At the last meeting September 12, the central bank cut rates 25 bp for the second straight meeting to 5.25% after keeping rates on hold in June and July. It said that the cut did not imply further cuts ahead but noted that it expected headline to remain within the target range and core to continue slowing. Headline inflation came in at 1.78% y/y in September vs. 2.03% in August, the lowest since October 2020 and in the bottom half of the 1-3% target range. Furthermore, core inflation fell to 2.64% y/y, the lowest since September 2021.
EUROPE/MIDDLE EAST/AFRICA
National Bank of Hungary releases its minutes Wednesday. At that September 24 meeting, the bank cut rates 25 bp to 6.5%. Deputy Governor Virag said that “The Monetary Council will continue to make cautious, patient and stability-oriented decisions” and added that the bank will consider holding or cutting rates 25 bp at each monthly meeting through year-end. September CPI data will be reported Thursday. Headline is expected to fall three ticks to 3.1% y/y. If so, it would be the lowest since February 2021 and nearing the center of the 2-4% target range. Next meeting is October 22 and a 25 bp cut to 6.25% is justified by falling inflation. However, if the forint remains under pressure, the bank may stay on hold. Looking ahead, the swaps market is pricing in 75 bp of total easing over the next 12 months.
Bank of Israel meets Wednesday and is expected to keep rates steady at 4.5%. At the last meeting August 28, the bank kept rates at 4.5%. Deputy Governor Abir noted “I would be very surprised if the conditions are in place for an interest rate cut before the end of the year. The surprise has been how long the war has been going on. This has slowed growth but has also had an impact on inflation, and it’s one of the reasons it is now once again out of our target range.” The swaps market is pricing in steady rates over the next six months followed by 25 bp of easing over the subsequent six months.
Czech Republic reports September CPI data Thursday. Headline is expected to rise two ticks to 2.4% y/y. If so, it would be the highest since May but still within the 1-3% target range. At the last meeting September 25, the central bank cut rates 25 bp to 4.25% by a 6-1 vote, with the dissent in favor of a larger 50 bp cut. Governor Michl said that going forward, “The vast majority of the bank board agreed that there was need for caution.” Next meeting is November 7 and another 25 bp cut to 4.0% is expected. Looking ahead, the swaps market is pricing in 100 bp of total easing over the next 12 months.
ASIA
Monetary Authority of Singapore meets sometime this week. Q3 GDP data will be reported that same day. Growth is expected at 1.9% q/q vs. 0.4% in Q2, while the y/y rate is expected at 3.7% vs. 2.9% in Q2. With growth remaining solid and core inflation still elevated, we expect another hold by the MAS. At the last meeting July 26, it also kept policy steady. Indeed, the last time the MAS tweaked its policy stance was at the October 2022 meeting, when it tightened policy by re-centering S$NEER higher to the upper end of the band. Looking ahead, the MAS could ease policy at its January meeting if price pressures ease.
China reports September money and credit data sometime this week. The data will not reflect the People’s Bank of China’s pump-priming measures announced and implemented in late September. However, we expect money and new loan data to pick up modestly in the coming months after the PBOC cut the policy-relevant 7-day reverse repurchase rate 20 bp to 1.50%, slashed banks’ reserve requirement ratio by 50 bp, reduced the down payment ratio on second homes to 15% from 25%, lowered rates for existing mortgages, and increased central bank support for buying unsold homes. September CPI and PPI data will be reported Sunday local time. CPI is expected to remain steady at 0.6% y/y while PPI is expected at -2.5% y/y vs. -1.8% in August. Clearly, deflationary risks remain in play.
Thailand reports September CPI data Monday. Headline is expected at 0.80% y/y vs. 0.35% in August, while core is expected at 0.74% y/y vs. 0.62% in August. If so, headline would remain below the 1-3% target range. At the last meeting August 21, the Bank of Thailand kept rates steady at 2.5% by a 6-1 vote, with the dissent in favor of a 25 bp cut. The bank noted that “The Committee deems that it is crucial to closely monitor the impacts of deterioration in credit quality on borrowing costs and overall credit growth, which could disturb economic activities.” Assistant Governor Piti added that “We will need to assess in the next meeting whether there’s something that will affect the economic outlook and warrant any policy action. If it’s still in line with our forecast, our stance will remain neutral.” Next meeting is October 16 and no change is expected. However, a dovish surprise is possible after the dovish pivot. The swaps market is pricing in 25 bp of easing over the next three months, with 50 bp of total easing seen over the next 12 months.
Taiwan reports September CPI and trade data Tuesday. Headline is expected at 2.00% y/y vs. 2.36% in August, while core is expected at 1.70% y/y vs. 1.80% in August. At the last meeting September 19, the central bank kept rates steady at 2.0% but tightened liquidity by raising commercial bank reserve ratios 25 bp for the second straight meeting. The bank also tightened home-buying rules for the second straight meeting, including expanding limits on borrowing to buy second homes to more regions. While the bank does not have an explicit inflation target, elevated price pressures and property market concerns should keep rates on hold for now. Indeed, the swaps market sees some risks of another rate hike over the next 12 months. Next meeting is December 19. Elsewhere, exports are expected at 11.8% y/y vs. 16.8% in August, while imports are expected at 12.4% y/y vs. 11.8% in August.
Reserve Bank of India meets Wednesday and is expected to keep rates steady at 6.5%. However, a couple of analysts polled by Bloomberg look for a 25 bp cut to 6.25%. Of note, three new MPC members join the panel while three others - Governor Das, Deputy Governor Patra, and Executive Director Ranjan - continue to hold their posts. At the last meeting August 8, the central bank kept rates steady at 6.5% by a 4-2vote, with the dissents in favor of a 25 bp cut. This was the same split as the June 7 decision to hold. The bank also voted to keep its stance at “withdrawal of accommodation.” Governor Das warned that the bank “has to remain vigilant to prevent spillovers or second round effects from persistent food inflation and preserve the gains made so far in monetary policy credibility.” Despite the hawkish stance, the swaps market is pricing in steady rates over the next three months followed by 25 bp of easing over the subsequent three months. August IP will be reported Friday and is expected at 1.1% y/y vs. 4.8% in July.
Bank of Korea meets Friday and is expected to cut rates 25 bp to 3.25%. At the last meeting August 22, the bank kept rates steady at 3.5% but it was a dovish hold as the statement removed a previous phrase that it would keep rates steady “for a sufficient period of time.” The bank added that it will “thoroughly assess the tradeoffs among policy variables such as inflation, growth, and financial stability, and examine the proper timing of rate cuts while maintaining a restrictive monetary policy stance.” Furthermore, Governor Rhee said that four BOK members were now open to cutting rates over the next three months, up from only two at the last meeting. Meanwhile, headline CPI inflation eased sharply in September to 1.6% y/y, the lowest rate since February 2021 and below the BOK’s 2% target. The market is pricing in 75-100 bp of total easing over the next 12 months.
