EM FX was mixed last week as the dollar mounted a comeback Friday. COP, BRL, and CLP outperformed while ARS, PHP, and TRY underperformed. We believe data last week helped cement a 25 bp hike at the next FOMC meeting May 2-3. The market is still pricing in one cut by year-end and that needs to get priced out before the dollar can mount a sustainable recovery.
Brazil reports January GDP proxy Monday. It is expected at 2.75% y/y vs. 1.42% in December. IP will be reported Wednesday and is expected at -2.1% y/y vs. 0.3%in January. Reports suggest the government will sent the final version of its new fiscal framework to Congress Monday. We believe the framework is enough to spur the central bank into cutting rates in the coming months. The May 3 COPOM meeting seems too soon but June 21 is possible and August 2 is likely. The market is pricing in 250 bp of easing over the next 12 months, which may be too aggressive.
Colombia reports February GDP proxy Tuesday. The economy is starting to turn higher despite ongoing tightening cycle. At the last policy meeting March30, the central bank downshifted to a 25 bp hike and suggested the end of the cycle was near. Next policy meeting is April 28 and rates are likely to be kept steady at 13.0%. However, the market is sees some odds of one last 25 bp hike to 13.25%. An easing cycle is seen starting over the next six months but that may be too aggressive as Governor Villar said it was unclear if it can cut rates this year as restrictive policy would be maintained “for some time.”
Bank of Israel releases its minutes Monday. At the April 3 meeting, the bank hiked rates 25 bp to 4.5% and noted that inflation is broad and remains high. The research department saw the policy rate at 4.75% in Q1 2024 but the bank noted that the rate path will be determined by the data. Lastly, it weighed in on the social unrest and estimated that it could shave off 2.8% of GDP over three years. Next policy meeting is May 22 and much will depend on the data and the shekel, which is one of the worst performing currencies YTD due largely to heightened political tensions. The market sees the policy rate peaking near 4.75% over the next six months.
Poland reports March core CPI Monday. It is expected at 12.2% y/y vs. 12.0% in February. If so, it would be the highest since November 1998. While headline inflation has been easing, the continue rise in core will make it harder and harder for the central bank to cut rates. As it is, the policy rate should be much higher. At the last policy meeting April 5, Governor Glapinski reiterated his hope that the bank will be able to cut rates by year-end. The market is pricing in the start of an easing cycle over the next 6-12 months but this seems very unlikely. Next policy meeting is May 10 and no change is expected then.
South Africa reports March CPI and February retail sales data Wednesday. Headline inflation is expected to fall a tick to 6.9% y/y while core is expected to remain steady at 5.2% y/y. If so, headline would resume the disinflation trend but would remain above the 3-6% target range. At the last policy meeting March 30, SARB delivered a hawkish surprise and hiked rates 50 bp to 7.75% vs. 25 bp expected. The bank raised its inflation forecast for this year to 6.0% vs. 5.4% previously and now sees inflation returning to the 3-6% target range in Q3 vs. Q2 previously. The bank said future decisions will remain data dependent. After the dovish surprise in January, markets were looking for a sign that the tightening cycle was nearing an end. We haven't gotten that yet and so the next meeting May 25 remains very much live. As SARB said, it will depend on how the data come in but the market is pricing in a peak policy rated between 8.0-8.25%. Elsewhere, sales are expected at -1.0% y/y vs. -0.8% in January.
Singapore reports March trade data Monday. NODX are expected at -18.7% y/y vs. -15.6% in February. Last week, the MAS left policy steady for the first time after five tightening moves over the past year and noted that “Singapore’s GDP growth is projected to be below trend this year. With intensifying risks to global growth, the domestic economic slowdown could be deeper than anticipated.” Singapore reported Q1 GDP at -0.7% q/q vs. -0.1% expected and 0.1% in Q4, while the y/y rate came in at 0.1% vs. 0.6% expected and 2.1% in Q4. Like the other region exporters, Singapore has yet to see much impact from China reopening.
People’s Bank of China sets its key 1-year MLF rate Monday. It is expected to remain steady at 2.75%. China reports Q1 GDP and March IP and retail sales data Tuesday. Growth is expected at 2.1% q/q vs. 0.0% in Q4, while the y/y rate is expected at 3.9% vs. 2.9% in Q4. IP is expected at 4.7% y/y vs. 2.4% in January-February while sales are expected at 8.0% y/y vs. 3.5% in January-February. Commercial banks will set their 1- and 5-year Loan Prime Rates Thursday and are expected to be kept steady at 3.65% and 4.30%, respectively. Further monetary easing is likely this year. Of note, PBOC Governor Yi said that it has largely ended its regular FX operations but stressed that policymakers still “reserve the right” to intervene if needed.
Bank Indonesia meets Tuesday and is expected to keep rates steady at 5.75%. At the last policy meeting March 16, the bank kept rates steady at 5.75% and Governor Warjiyo said again that there’s no need to raise interest rates further to fight inflation, just as he said at the last meeting in February. Warjiyo stressed that “BI’s interest rate policy is based on expectations and projections of inflation, balanced with economic growth,” adding that current rates are “enough.” He noted Ramadan festivities could boost inflation through next month but added that headline inflation would return to the 2-4% target range by September. We believe that the tightening cycle has likely ended.
Malaysia reports March trade data Wednesday. Exports are expected at -2.8% y/y vs. 9.8% in February and imports are expected at 4.5% y/y vs. 12.4% in February. March CPI will be reported Thursday and headline is expected to fall a tick to 3.6% y/y. At the last policy meeting March 9, Bank Negara kept rates steady at 2.75% and said it “will continue to calibrate the monetary policy settings that balance the risks to domestic inflation and sustainable growth.” It expected both headline and core inflation to moderate over the course of this year but still remain elevated. The bank surprised the markets with a pause back in January. Since then, headline inflation eased to 3.7% y/y in January and February, the lowest since June 2022, and so it seems we have seen the end of the cycle after only 100 bp of tightening. Next policy meeting is May 3 and no change is expected then.
Taiwan reports March export orders Thursday. Orders are expected at -20.0% y/y vs. -18.3% in February. If so, this would be the weakest since December and suggests very little improvement in shipments over the next six months. China reopening has had very little impact on regional trade and activity. Korea reports trade data for the first twenty days of April Friday and is likely to show ongoing weakness.