EM FX was mostly weaker as the broad dollar rally continued. PHP outperformed and was the only one to gain last week while ARS .COP, and MYR underperformed. The same drivers boosting the dollar this past month are likely to persist this week, including strong U.S. data and higher U.S. yields. At the same time, the EM-negative drivers are also likely to persist, including global growth concerns and bad news out of China.
AMERICAS
Mexico reports mid-August CPI Thursday. Headline is expected at 4.65% y/y vs. 4.78% previously and core is expected at 6.22% y/y vs. 6.52% previously. Banco de Mexico releases its minutes Thursday too. At that August 10 meeting, the bank kept rates steady at 11.25% and Governor Rodriguez said that the current rate would be maintained “for a period that’s sufficiently long to see that the inflation panorama has advanced.” In the past, she and other bank officials have hinted at no change in policy through Q3 at least, which leaves November 9 and December 14 as possibilities for a rate cut. The swaps market is pricing in steady rates over the next three months followed by 25 bp of easing over the subsequent three months, which would make it much mor cautious than Brazil or Chile so far. Q4 current account data will be reported Friday.
Brazil reports mid-August IPCA inflation and July current account and FDI data Friday. Headline inflation is expected at 4.12% y/y vs. 3.19% in mid-July. If so, it would be the highest since mid-April but still withing the 1.75-4.75% target range. The jump is due in large part to low base effects and while this will persist next month, the central bank is likely to continue cutting rates in 50 bp clips as signaled previously. Next COPOM meeting is September 20 and another 50 bp cut to 12.75% is expected. The swaps market is pricing in 125 bp of total tightening over the next three months followed by another 100 bp of tightening over the subsequent three months.
EUROPE/MIDDLE EAST/AFRICA
Poland reports July IP and PPI Monday. IP is expected at -0.9% y/y vs. -1.4% in June, while PPI is expected at -1.0% y/y vs. 0.5% in June. Real retail sales will be reported Tuesday and are expected at -3.6% y/y vs. -4.7% in June. Central bank minutes will be published Wednesday. At that July 6 meeting, the bank kept rates steady at 6.75% but highlight a potential cut next month as Governor Glapinski said “If inflation will be in the single digits and if the projection for the nearest quarters and years shows, with a 90% certainty, that price growth will slow further, then it’s possible in September.” Next policy meeting is September 13 and a 25 bp cut then to 6.5% seems likely. The swaps market is pricing in 50 bp of easing over the next three months followed by another 50 bp over the subsequent three months.
South Africa reports July CPI Wednesday. Headline is expected at 4.9% y/y vs. 5.4% in June, while core is expected at 4.9% y/y vs. 5.0% in June. If so, headline would be the lowest since August 2021 and further within the 3-6% target range. At the last policy meeting, SARB delivered a dovish surprise and kept rates steady at 8.25% vs. an expected 25 bp hike to 8.5%. The vote was 3-2 with the dissents in favor of a hike. Governor Kganyago warned that “Risk to the inflation outlook are assessed to the upside” and added that “It is not the end of the hiking cycle, it depends on the data and risk. That is what it boils down to.” Next policy meeting is September 21 and no change is expected then as we think the tightening cycle has ended. The swaps market is pricing in steady rates over the next twelve months.
Turkey central bank meets Thursday and is expected to hike rates 250 bp to 20.0%. However, market expectations are all over the place. Of the 21 analysts polled by Bloomberg, 2 see 100 bp, 2 see 150 bp, 4 see 200 bp, 12 see 250 bp, and 1 sees 300 bp. The bank has delivered two dovish surprises in a row with a 650 bp hike in June and a 250 bp hike in July. The swaps market is pricing in a peak policy rate around 27.5% over the next twelve months, which would not be enough to bring inflation down and stabilize the lira.
ASIA
Korea reports trade data for the first 20 days of August Monday. Bank of Korea meets Thursday and is expected to keep rates steady at 3.5%. It has kept rates on hold since the last 25 bp hike in January and while Governor Rhee continues to warn of potential hikes, we think the tightening cycle has ended as inflation falls towards the 2% target. Of note, the swaps market is pricing in one more 25 bp hike over the next six months.
China commercial banks set their key Loan Prime Rates Monday. Both the 1- and 5-year LPRs are expected to mirror last week’s unexpected MLF move and both should be cut 15 bp to 3.40% and 4.05%, respectively. Officials from the central bank and financial regulators reportedly met with bank executives and told them to increase loans to boost the economy. July new loans were the lowest since 2009. Authorities also urged banks to make adjustments for home mortgages but there were no further details. It seems clear to us that the solution to a huge looming debt crisis is not to pile up more debt.
Taiwan reports July export orders and Q2 current account data Monday. Orders are expected at -15.5% y/y vs. -24.9% in June. If so, this would be the best reading since October but due in large part to low base effects. The regional outlook for trade and activity is likely to remain weak until 2024. July IP will be reported Wednesday and is expected at -13.45% y/y vs. -16.63% in June.
Singapore reports July CPI Wednesday. Headline is expected at 4.2% y/y vs. 4.5% in June and core is expected at 3.8% y/y vs. 4.2% in June. If so, headline would be the lowest since January 2022. While the MAS does not have an explicit inflation target, falling price pressures should allow it to keep policy steady at the October meeting and start easing at the April 2024. At the last policy meeting in April, the bank kept policy steady by keeping the slope, width, and midpoint of its S$NEER trading band unchanged. July IP will be reported Friday and is expected at -4.4% y/y vs. -4.9% in June.
Bank Indonesia meets Thursday and is expected to keep rates steady at 5.75%. At the last policy meeting July 25, the bank left rates steady but cut reserve requirements for certain banks that would free up an estimated IDR47 trln in liquidity. Governor Warjiyo continued to stress that “The policy focus is oriented towards strengthening rupiah stability to manage imported inflation and mitigate the contagion effect of global financial market uncertainty.” Bloomberg consensus sees the start of an easing cycle with 25 bp in Q1 followed by 25 bp in each successive quarter in 2024, suggesting a very cautious path. We concur. With the Fed expected to maintain tight policy, we believe that Bank Indonesia has very little cushion to cut rates without weighing on the rupiah.
Malaysia reports July CPI Friday. Headline is expected at 2.1% y/y vs. 2.4% in June. If so, it would be the lowest since August 2021. While Bank Negara does not have an explicit inflation target, falling price pressures should allow it to keep policy steady near-term and start easing in 2024. At the last policy meeting July 6, the bank kept rates steady while noting that the economy grew more moderately in recent months and warning 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 it delivered a hawkish surprise and hiked rates 25 bp to 3.0%. Next meeting is September 7 and no change is expected then. The swaps market is pricing in one more 25 bp hike over the next twelve months but we think it unlikely.
