EM FX was mostly softer last week despite the dollar’s mixed performance against the majors. COP, KRW, and IDR outperformed while MXN, BRL ,and ZAR underperformed. The U.S. data last week came in on the soft side, leading to some dollar weakness that reversed sharply Friday after the jobs data. While there was a little something for both hawks and doves in that report, the market eventually recognized that the underlying details support further Fed tightening. U.S. rates and the dollar ended the week near recent highs and that uptrend should continue this week. Elsewhere, China is likely to weigh on sentiment and so we believe EM will remain under pressure.
AMERICAS
Chile central bank meets Tuesday and is expected to cut rates 75 bp to 9.5%. However, over a third of the analysts polled by Bloomberg see a larger 100 bp move. At the last meeting, the bank delivered a hawkish surprise and started the easing cycle with a 100 bp cut vs. 75 bp expected. Minutes to that meeting showed that show that the bank is planning for total cuts of 325-350 bp by year-end, which implies a policy rate of 7.5-8.0%. With two more policy meetings after this week on October 26 and December 19, that implies cuts of at least 75 bp at each remaining one. August trade data will be reported Thursday. August CPI will be reported Friday, with headline expected at 5.6% y/y vs. 6.5% in July. If so, it would be the lowest since September 2021 but still above the 2-4% target range.
Mexico reports August CPI Thursday. Headline is expected at 4.64% y/y vs. 4.79% in July, while core is expected at 6.11% y/y vs. 6.64% in July. If so, headline would be the lowest since February 2021 and nearing the 2-4% target range. Yet minutes from the last policy meeting August 10 show the bank is in no hurry to cut rates. Several policymakers said it was too soon to consider easing, with one noting that it could hold rates and one even warned of the potential need for further tightening. It was noted that the peso’s appreciation was helping ease price pressures, but that the balance of inflation risks remain biased to the upside. Next policy meetings are September 28 and November 9 and no change is expected at either one as the swaps market sees steady rates over the next three months. However, 25 bp of easing is seen over the subsequent three months, suggesting a cut at the December 14 meeting.
Colombia reports August CPI Thursday. Headline is expected at 11.18% y/y vs. 11.78% in July, while core is expected at 11.22% y/y vs. 11.44% in July. If so, headline would be the lowest since August 2022 but still well above the 2-4% target range. Next policy meeting is September 29 and no change is expected. At the last policy meeting July 31, the bank kept rates steady at 13.25% and minutes show that policymakers noted that inflation remains “excessively high compared with that observed in both the major advanced countries and similar economies in Latin America.” Furthermore, they “acknowledged that the fight against inflation is not over. In this regard, they agreed on the need to maintain the current restrictive stance of monetary policy, until they see convincing signs of the convergence of inflation toward its target.” The swaps market is pricing in the start of an easing cycle with 50 bp over the next three months followed by another 125 bp over the subsequent three months. This seems too aggressive given the hawkish stance.
EUROPE/MIDDLE EAST/AFRICA
Turkey reports August CPI Monday. Headline is expected at 55.90% vs. 47.83% in July, while core is expected at 61.70% vs. 56.09% in July. If so, it would be the second straight month of acceleration to the highest since January. The next central bank policy meeting is September 21 and another large cut is expected then. At the last meeting August 24, the bank delivered a hawkish surprise with a 750 bp hike to 25.0% vs. 250 bp expected. The swaps market is pricing in 475 bp of tightening over the next three months followed by another 250 bp over the subsequent three months that would see the policy rate peak near 32.25%. This would not be enough to lower inflation and stabilize the lira.
Bank of Israel meets Monday and is expected to keep rates steady at 4.75%. At the last meeting July 10, the bank left rates steady at 4.75% and was the first pause since the tightening cycle began in April 2022. Governor Yaron warned that “We are in an environment of great uncertainty, and there are several upside risks to inflation pressures. It is certainly possible that we will need to increase the interest rate going forward, if we see evidence that the inflation environment is not moderating at a suitable pace.” Since then, inflation came in lower than expected and is nearing the 1-3% target range. The swaps market is pricing in steady rates over the next six months followed by the start of a modest easing cycle over the subsequent six months.
Hungary reports July retail sales Wednesday. Sales are expected at -7.4% y/y vs. -8.3% in June. July IP will be reported Thursday and is expected at -6.4% y/y vs. -6.1% in June. August CPI and July trade data will be reported Friday. Headline inflation is expected at 16.3% y/y vs. 17.6% in July. If so, it would be the lowest since August 2022 but still well above the 2-4% target range. That hasn’t stopped the central bank from continuing its aggressive easing cycle. Last week, it cut its 1-day repo rate 100 bp to 14.0% and is expected to do the same at the next meeting September 26 and will put it equal to the base rate. After that, both rates will be cut in unison, with the swaps market pricing in a rate of 11.5% in three months and 9.5% in six months.
ASIA
Korea reports August CPI Tuesday. Headline is expected at 2.8% y/y vs. 2.3% in July. If so, it would be the first acceleration since January and further away from the 2% target. At the last policy meeting August 24, the Bank of Korea left rates steady at 3.5%. As in past meetings, all six members of the board remain open to another hike if needed. However, we think the tightening cycle has likely ended as growth slows and inflation falls back towards the 2% target. Of note, the swaps market is pricing in one more 25 bp hike over the next six months. The next policy meeting is October 19 and no change is expected.
Philippines reports August CPI Tuesday. Headline is expected to remain steady at 4.7% y/y. At the last policy meeting August 17, the central bank left rates steady at 6.25%. New Governor Remolona stressed that the bank is “ready to tighten” if needed, ruled out a rate cut at the next meeting, and said that it is unlikely to reduce reserve requirements while it’s still in tightening mode. The swaps market is pricing in the start of an easing cycle over the next three months, which seems too soon given this hawkish bias. The next policy meeting is September 21 and no change is expected then. July trade data will be reported Friday. Exports are expected at 3.0% y/y vs. 0.8% in June, while imports are expected at -12.0% y/y vs. -15.2% in June.
Caixin reports August services and composite PMI Tuesday. Services is expected at 53.7 vs. 54.1 in July. China reports July trade data Thursday. Exports are expected at -9.8% y/y vs. -14.5% in July, while imports are expected at -9.0% y/y vs. -12.4% in July. August CPI and PPI will be reported Saturday local time. Despite rising deflation risks and a sluggish economy, policymakers have only rolled out limited stimulus measures and so growth is likely to slow further.
Thailand reports August CPI Tuesday. Headline is expected at 0.78% y/y vs. 0.38% in July, while core is expected at 0.80% y/y vs. 0.86% in July. If so, headline would accelerate for a second straight month to the highest since April but still below the 1-3% target range. At the last policy meeting August 2, the Bank of Thailand hiked rates 25 bp to 2.25% and signaled that the cycle was nearing an end as it dropped its reference to the need for “gradual and measured” rate hikes going forward. Assistant Governor Piti also noted that overall financial conditions have turned less accommodative. The swaps market is pricing in one last hike to 2.5% over the next six months. The next policy meeting is September 27 and we could see that last hike then.
Taiwan reports August CPI Wednesday. Headline is expected at 2.10% y/y vs. 1.88% in July. If so, it would be the second straight month of acceleration to the highest since April. However, the central bank does not have an explicit inflation target and is likely to maintain steady policy for now as the economy slows. Next policy meeting is September 21 and rates are likely to be kept steady at 1.875%. August trade data will be reported Friday. Exports are expected at -7.3% y/y vs. -10.4% in July, while imports are expected at -15.9% y/y vs. -20.9% in July.
Bank Negara meets Thursday and is expected to keep rates steady at 3.0%. At the last policy meeting July 6, the bank left rates steady at 3.0% and warned of risks to the domestic outlook because global growth remains subject to downside risks. This was a big change in tone from the May meeting, when Bank Negara hiked rates 25 bp and said that “In light of the continued strength of the Malaysian economy, the MPC also recognizes the need to ensure that the stance of monetary policy is appropriate to prevent the risk of future financial imbalances.” We believe the tightening cycle is over. However, the swaps market is pricing in some risk of a 25 bp hike over the next twelve months that would see the policy rate peak near 3.25%.
