EM FX was mostly softer last week as the dollar mounted a broad-based recovery. MYR, THB, and CNY outperformed while COP, MXN, and BRL underperformed. Key U.S. data this week will help determine whether the dollar recovery can continue. We remain constructive on the U.S. economic outlook and believe that the data will be dollar-supportive. If so, EM FX is likely to remain under pressure.
AMERICAS
Peru reported August CPI over the weekend. Headline came in at 2.03% y/y vs. 2.00% expected and 2.13% in July. This was the lowest since May and close to the center of the 1-3% target range. At the last policy meeting August 8, the bank delivered a dovish surprise and cut rates 25 bp to 5.5% vs. no change expected, noting that “Core inflation in July showed less persistence than in previous months.” The bank’s chief economist predicted that growth was 2.7% in H1 and did not rule out further cuts. Next policy meeting is September 12 and another 25 bp cut to 5.25% seems likely.
Chile central bank meets Tuesday and is expected to cut rates 25 bp to 5.5%. However, 3 of the 16 analysts polled by Bloomberg see steady rates. At the last meeting July 31, the bank delivered a hawkish surprise and kept rates steady vs. an expected 25 bp cut to 5.5%. The decision was unanimous, which was surprising since the vote to cut rates 25 bp back in July was 4-1, with the dissent in favor of a larger 50 bp move then. The bank stressed that the policy rate will continue to fall but added that the bulk of the easing was already seen in H1 of this year. August CPI will be reported Friday. Headline is expected at 4.7% y/y vs. 4.6% in July. If so, it would be the fifth straight month of acceleration to the highest since November and so we see risks of another hawkish surprise this week. The market is pricing in 125 bp of easing over the next 12 months that would see the policy rate bottom near 4.5%.
Colombia reports August CPI Friday. Headline is expected at 6.35% y/y vs. 6.86% in July, while core is expected at 6.87% y/y vs. 7.24% in July. If so, headline would be the lowest since December 2021 but still well above the 2-4% target range. At the last policy meeting July 31, the central bank cut rates 50 bp to 10.75%. The vote was 5-2, with the two dissents in favor of a larger 75 bp cut. Governor Villar tilted dovish, noting that inflation pressures have eased in recent months and that the risks related to a weak peso have dissipated. Next meeting is September 30 and another 50 bp cut to 10.25% seems likely. The market is pricing in 325 bp of easing over the next 12 months that would see the policy rate bottom near 7.5%.
EUROPE/MIDDLE EAST/AFRICA
Turkey reports August CPI Tuesday. Headline is expected at 51.83% y/y vs. 61.78% in July, while core is expected at 50.50% y/y vs. 60.23% in July. If so, headline would decelerate for the third straight month to the lowest since July 2023. At the last policy meeting August 20, the central bank delivered a hawkish hold and reiterated that it would keep policy tight until “a significant and sustained decline in the underlying trend of monthly inflation is observed.” It added that “The alignment of inflation expectations and pricing behavior with projections has gained relative importance for the disinflation process.” Next meeting is September 19 and another hold seems likely. However, the market is still pricing in the start of an easing cycle over the next three months.
National Bank of Poland meets Wednesday and is expected to keep rates steady at 5.75%. At the last meeting July 3, the bank kept rates steady and Governor Glapinski said rates may be cut in 2026 at the earliest. Since then, inflation has continued to accelerate to 4.3% y/y in August, further above the 1.5-3.5% target range. However, Glapinski has softened his stance and said that a rate debate is warranted if the CPI drop is sustainable. Glapinski added that rate cut talk before 2026 cannot be ruled out. The swaps market is pricing in 75 bp of easing over the next 12 months, followed by 125 bp of further easing over the subsequent 12 months that would see the policy rate bottom near 3.75%.
ASIA
Caixin reports August PMIs. Manufacturing will be reported Monday and is expected at 50.0 vs. 49.8 in July. Services and composite PMIs will be reported Wednesday, with services expected at 52.3 vs. 52.1 in July. Over the weekend, official PMIs were mixed. Manufacturing came in at 49.1 vs. 49.5 expected and 49.4 in July and non-manufacturing came in at 50.3 vs. 50.1 expected and 50.2 in July. This led the composite to fall a tick to 50.1, the lowest since December 2022 which was right when China reopened. With limited stimulus measures taken so far, we expect the economy to continue slowing.
Indonesia reports August CPI Monday. Headline is expected at 2.12% y/y vs. 2.13% in July, while core is expected at 1.99% y/y vs. 1.95% in July. If so, headline would be the lowest since February 2022 and nearing the bottom of the 2-4% target range. At the last policy meeting August 21, the bank kept rates steady at 6.25% and Governor Warjiyo said that “In the third quarter, our focus is to further strengthen the stability of the rupiah.” He added that room for easing will likely open up towards the end of the year, which lines up with Bloomberg consensus for the first cut coming in Q4. Of note, the next meeting is September 18. We suspect BI will not cut rates ahead of the FOMC decision that same day, but with the rupiah trading at the strongest level since January, we see some risks of a dovish surprise.
Korea reports August CPI Tuesday. Headline is expected at 2.0% y/y vs. 2.6% in July. Q2 GDP data will be reported Thursday. If so, it would be the lowest since March 2021 and right at the inflation target. At the last policy meeting August 22, Bank of Korea delivered 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 open to cutting rates over the next three months, up from only two at the previous meeting. The next meeting is October 11 and given the forward guidance, that meeting is very much live. The market sees around 50% odds of a 25 bp rate cut over the next three months, which becomes fully priced in over the subsequent three months. Furthermore, another 50 bp of easing is seen over the subsequent six months that would see the policy rate bottom near 2.75%.
Philippines reports August CPI Thursday. Headline is expected at 3.9% y/y vs. 4.4% in July. If so, it would return to the 2-4% target band after one month above it. At the last policy meeting August 15, the central bank cut rates 25 bp to 6.25% and Governor Remolona said “It’s one move. We may need further moves in the same direction” and added that another 25 bp cut was possible in either October or December. Remolona said “We’re somewhat more confident in the inflation numbers coming down than in the GDP numbers going up.” Next meeting is October 17 and the outcome will depend on whether inflation continues falling. The swaps market is pricing in 200 bp of easing over the next 12 months that would see the policy rate bottom near 4.25%.
Thailand reports August CPI Thursday. Headline is expected at 0.47% y/y vs. 0.83% in July. If so, it would be the lowest since April and further below the 1-3% target range. At the last policy meeting August 21, the bank kept rates steady at 2.5% and the vote stayed 6-1, with the one dissent again 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 if inflation continues to fall, we see risks of a cut then. The swaps market is pricing in around 65% odds of a 25 bp rate cut over the next three months, with 50 bp of total easing fully priced in over the next 12 months that would see the policy rate bottom near 2.0%.
Bank Negara Malaysia meets Thursday and is expected to keep rates steady at 3.0%. At the last policy meeting July 11, the bank kept rates steady at 3.0% and noted that “As expected, inflation will trend higher in the second half of 2024, amid the recent rationalization of diesel subsidies,” adding that while it views the impact as manageable, upside risks will depend on “spillover effects of further domestic policy measures on subsidies and price controls to broader price trends.” While the bank does not have an explicit inflation target, the fact that inflation has remained steady at 2.0% for three straight months despite the end of some fuel subsidies over the summer suggests it will lean more dovish. The swaps market is pricing in 25 bp of easing over the next 12 months.
