EM FX was mostly firmer last week, taking advantage of broad dollar weakness. ZAR, PLN, and IDR outperformed while CLP, TRY, and ARS underperformed. All eyes are on the Jackson Hole Symposium, where Chair Powell is expected to set the table for a September cut while pushing back against the need for an aggressive easing cycle. Global PMI readings for August are also expected to reinforce the divergence theme that favors the dollar. As such, we believe EM FX remains vulnerable.
AMERICAS
Mexico reports mid-August CPI and June GDP proxy Thursday. Headline is expected at 5.31% y/y vs. 5.52% previously, while core is expected to remain steady at 4.08% y/y. If so, it would be the second straight deceleration for headline but still well above the 2-4% target range. Banco de Mexico minutes will also be released Thursday. At that August 8 meeting, it restarted the easing cycle with a 25 bp cut to 10.75%. The decision was 3-2, with the dissents in favor of steady rates. Several policymakers have since said that the cut was justified by falling core inflation, but Deputy Governor Heath has since called the move “premature.” Next meeting is September 26, and it will be a close call. Of note, the market is pricing in 25 bp of easing over the next three months and 175 bp of total easing over the next 12 months.
EUROPE/MIDDLE EAST/AFRICA
Turkey central bank meets Tuesday and is expected to keep rates steady at 50.0%. At the last meeting July 23, the central bank left rates steady at 50.0% for the fourth straight time and warned that inflation pressures “remain alive.” The bank stressed that “The tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range. Monetary policy stance will be tightened in case a significant and persistent deterioration in inflation is foreseen.” Despite this cautious guidance, the market is still pricing in the start of an easing cycle over the next three months.
South Africa reports July CPI Wednesday. Headline is expected to fall three ticks to 4.8% y/y, while core is expected to remain steady at 4.5% y/y. If so, headline would be the lowest since last August and approaching the midpoint of the 3-6% target range. At the last meeting July 18, the South African Reserve Bank kept rates steady at 8.25%. It was a 4-2 vote, with the dissents in favor of a 25 bp cut. This was the first split vote since September 2023, and means that the bar to a cut has fallen significantly. Next meeting is September 19. August CPI data will be reported the day before and if disinflation continues, we believe the SARB will cut rates then. Of note, the market is pricing in 25 bp of easing over the next three months and 125 bp of total easing over the next 12 months.
National Bank of Poland releases its minutes Thursday. At that July 3 meeting, the bank kept rates steady at 5.75% and maintained a hawkish stance. Governor Glapinski said that inflation is likely to start easing in Q1 2025 but added that the bank would cut rates in 2026 at the earliest. Despite the hawkish guidance, the market is pricing 50% odds that the easing cycle will begin over the next three months, with 50 bp of total easing seen over the next 12 months. Next meeting is September 4, and no change is expected.
ASIA
Malaysia reports June trade data Monday. July CPI will be reported Thursday. Headline is expected to pick up a tick to 2.1% y/y. At the last policy meeting July 11, Bank Negara 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.” Next meeting is September 5, and no change is expected then. The market is pricing in 25 bp of easing over the next 12 months.
Bank Indonesia meets Wednesday and is expected to keep rates steady at 6.25%. At the last meeting July 17, the bank kept rates steady at 6.25%. Governor Warjiyo said that “The focus of monetary policy in the short-term is directed at strengthening rupiah exchange rate stabilization and attracting foreign portfolio inflows.” He added that “Our inflation is low and our economic growth is good, that’s why I said there is room to lower the interest rate, if there’s no global influence.” Bloomberg consensus sees the first cut coming in Q4. With the rupiah trading at the strongest level since March, we see risks of a dovish surprise this week.
Bank of Thailand meets Wednesday and is expected to keep rates steady at 2.5%. At the last meeting June 12, the bank kept rates steady at 2.5% but the tone was a less dovish hold compared to previous meetings. Only one MPC member dissented in favor of a 25 bp cut vs. two members at the last two meetings in April and February. Furthermore, the statement scrapped the phrase that “uncertainties on the Thai economy remain high.” Of note, reports have emerged that Thaksin is pushing his party to scrap the controversial cash handouts that former Prime Minister Thavisin enacted. If so, BOT is likely to tilt more dovish, as it has been very concerned about the inflationary impact of the estimated $14 bln program. The swaps market is pricing in decent odds of a rate cut over the next three months, with 50 bp of total easing seen over the next 12 months. Ahead of that, Thailand reports Q2 GDP data Monday.
Bank of Korea meets Thursday and is expected to keep rates steady at 3.5%. At the last meeting July 11, the bank kept rates steady at 3.5% but it was a dovish hold as it said that it will consider rate cut timing while assessing the outlook for inflation and financial stability. The decision was unanimous, but Governor Rhee said that excluding him, four BOK members saw steady rates over the next three months and two were open to a rate cut during that same period. Rhee also noted that “Market expectations for a cut are somewhat excessive.” The market still sees steady rates over the next three months, followed by 25 bp of easing over the subsequent three months. Korea also reports trade data for the first 20 days of August Wednesday.
Singapore reports July CPI Friday. Headline is expected at 2.6% y/y s. 2.4% in June, while core is expected to remain steady at 2.9% y/y. While the Monetary Authority of Singapore does not have an explicit inflation target, persistent price pressures should keep it on hold at its quarterly policy meeting in October. At the last meeting July 27, the MAS kept policy unchanged and noted that “Barring renewed shocks to costs, core inflation should step down more discernibly” in Q4. It reiterated that inflation would slow “further to around 2% in 2025” after coming in between 2-3% this year, lower than the 2.5-3.5% range previously forecast.
