EM FX was mixed last week despite broad-based dollar weakness against the majors. CLP, THB, and CZK outperformed while MXN, TRY, and ARS underperformed. The dollar is likely to remain under pressure after Powell’s dovish Jackson Hole speech. However, if the Fed is truly data dependent, we expect firm U.S. data over the coming weeks to reinforce our belief that the economic trajectory does not warrant aggressive easing. Until that happens, however, EM FX should continue to gain.
AMERICAS
Mexico reports July trade data Tuesday. Banco de Mexico releases its quarterly inflation report Wednesday. At the last meeting August 8, the bank restarted the easing cycle with a 25 bp cut to 10.75% and said that inflation trends may allow for the discussion of more cuts. It was a 3-2 and the minutes underscored the split. Some members felt that the slowdown in activity was greater than expected and that risks are biased to the downside. All said that disinflation was expected to continue, but most felt that the balance of risks to inflation were biased to the upside and that the inflationary environment remains complex. Since that meeting, inflation readings have fallen further. Next Banxico meeting is September 26 and if disinflation continues, another 25 bp cut to 10.5% seems likely. The swaps market is pricing in 175 bp of easing over the next 12 months.
Brazil reports mid-August IPCA inflation Tuesday. Headline is expected at 4.34% y/y vs. 4.45% in mid-July. If so, it would be the first deceleration since mid-May. At the last meeting, COPOM kept rates steady at 10.5% and gave no hint of when a tightening cycle would begin. Next meeting is September 18 and a 25 bp hike to 10.75% is expected. The swaps market is pricing in 150 bp of total tightening over the next 12 months. July central government budget data will be reported Thursday and a primary deficit of -BRL8.5 bln is expected vs. -BRL38.8 bln in June. Consolidated budget data will be reported Friday and a primary deficit of -BRL4.5 bln is expected vs. -BRL40.9 bln in June. July current account and FDI data will be reported Monday and is expected to underscore the growing twin deficit problem for Brazil.
EUROPE/MIDDLE EAST/AFRICA
National Bank of Hungary meets Tuesday and is expected to keep rates steady. However, the market is split as a third of the 18 analysts polled by Bloomberg look for a 25 bp cut to 6.5%. At the last meeting July 23, the bank cut rates 25 bp and Deputy Governor Virag said market bets for one or two more cuts this year were “realistic.” Since that meeting, July CPI came in at 4.1% y/y, the highest since December and back above the 2-4% target range and so a hold this week seems warranted. The swaps market is pricing in 100 bp of easing over the next 12 months.
Bank of Israel meets Wednesday and is expected to keep rates steady at 4.5%. At the last meeting July 8, the bank kept rates steady at 4.5% and said it expects the Gaza conflict to wind down in early 2025. The research department saw the policy rate at 4.25% in Q2 2025, with the bank noting that “Due to the revised assumption regarding the duration of the fighting, our assessment is that the risk premium, which rose due to the war, will decline more gradually than we assumed. A higher interest rate will be necessary in order to stabilize inflation.” Since that meeting, inflation accelerated to 3.2% in July, the highest since November and back above the 1-3% target range. As such, another hold this week seems warranted. The swaps market is pricing in 50 bp of total easing over the next 12 months that would see the policy rate bottom near 4.0%.
Poland reports August CPI Friday. Headline is expected to pick up a tick to 4.3% y/y. If so, it would be the highest since December and would move further above the 1.5-3.5% target range. At the last meeting July 3, the central bank kept rates steady at 5.75%. Governor Glapinski said rates may be cut in 2026 at the earliest, but he has since softened his stance and said last week that a rate debate is warranted if the CPI drop is sustainable. Glapinski added that rate cut talk before 2026 cannot be ruled out. Next meeting is September 4 and another hold is expected. The swaps market is pricing in 100 bp of easing over the next 12 months, followed by 100 bp of further easing over the subsequent 12 months.
ASIA
PBOC sets its 1-year MLF rate Monday. It is expected to be kept steady at 2.30% after the surprise 20 bp cut July 25. That said, further stimulus is likely as the economy struggles. July industrial profits will be reported Tuesday. China then reports official August PMIs Saturday local time. Manufacturing is expected at 49.5 vs. 49.4 in July, while non-manufacturing is expected at 50.0 vs. 50.2 in July. Caixin PMIs will be reported next week. Weakness in the mainland economy is likely to persist over the medium-term, as policymakers so far have refrained from taking the painful measures necessary to address the huge debt overhang.
Korea reports July IP Friday. IP is expected at 7.6% y/y vs. 3.8% in June. Much of the improvement is due to low base effects from 2023 and will wear off in Q4 and beyond. August trade data Sunday local time. Exports are expected at 13.5% y/y vs. 13.9% in July, while imports are expected at 7.1% y/y vs. 10.5% in July. Here too, much of the improvement is due to low base effects that will wear off in Q4 and beyond. Yen strength since mid-July should help boost Korean export competitiveness, but it will take some time before it shows up in the trade data.
