2021 was a tough year for EM FX. Only two currencies were able to post gains against the dollar, CNY (2.7%) and TWD (2.3%). TRY (-44%), ARS (-18%), CLP (-16.5%), and COP (-16%) were the worst performers last year but really, no one was spared. 2022 doesn’t look much better for EM, not with global liquidity being removed at an unprecedented pace and local EM liquidity following suit. The strong dollar trend is likely to remain intact even as headwinds to global growth pick up and so we remain negative on EM FX. However, it is important to focus on likely divergences within EM.
AMERICAS
Brazil reports December trade data Monday. November IP will be reported Thursday and is expected at 0.1% m/m vs. -0.6% in October. 2022 will be a challenging year for Brazil. President Bolsonaro is running loose fiscal policy as he intensifies his reelection efforts ahead of November. In turn, this further muddies the outlook for monetary policy as more tightening is likely to be needed to offset the fiscal impulses. Next COPOM meeting is February 2 and another 150 bp hike to 10.75% has been flagged by the central bank. Swaps market is pricing in a peak policy rate of 12.50% by mid-year before falling to 11.50% by year-end.
Colombia reports December CPI Wednesday. Headline inflation is expected at 5.42% y/y vs. 5.26% in November. If so, it would be the highest since January 2017 and further above the 2-4% target range. Next policy meeting is January 28 and another 50 bp hike to 3.5% is likely. However, the recent larger than expected 10% increase in the minimum wage suggests risks of a hawkish surprise after the central bank just delivered the expected 50 bp hike to 3.0% at the December 17 meeting. Bloomberg consensus sees the policy rate peaking at 5.0% in Q3.
Banco de Mexico minutes will be released Thursday. Mexico reports December CPI Friday, with headline inflation expected at 7.51% y/y vs. 7.37% in November. If so, it would be the highest since January 2001 and further above the 2-4% target range. Next policy meeting is February 10. The central bank just delivered a hawkish surprise with a 50 bp hike to 5.5% at the December meeting 16. Swaps market is pricing in 200 bp of tightening in 2022. However, the monetary policy outlook has been clouded by new Governor Rodriguez, all the more so after AMLO recently said the bank should help boost growth. This is playing with fire, as an independent central bank is needed during these difficult times.
Peru central bank meets Thursday and is expected to hike rates 50 bp to 3.0%. Inflation was 6.43% y/y in December, the highest since January 2009 and further above the 1-3% target range. The central bank just delivered the expected 50 bp hike to 2.5% at the December 9 meeting. However, with inflation still accelerating, the bank may have to pick up the pace of tightening and so we see risks of a hawkish surprise this week. Bloomberg consensus sees the policy rate peaking at 4.0% by year-end, which likely understates the bank’s need to tighten.
Chile reports December CPI and trade data Friday. Headline inflation was 6.7% y/y in November, well above the 2-4% target range. The central bank just delivered the expected 125 bp hike to 4.0% at the December 14 meeting. Minutes show that a 150 bp hike was discussed but policymakers wanted to avoid surprising the markets even as “it’s necessary for the key rate to move toward a restrictive level.” As such, another large hike is likely at the next meeting in early 2022. Swaps market is pricing in 200-225 bp of tightening in H1 22. However, the incoming Boric administration adds a layer of uncertainty to both fiscal and monetary policy.
EUROPE/MIDDLE EAST/AFRICA
Turkey reports December CPI Monday. Headline inflation is expected at 27.36% y/y vs. 21.31% in November. If so, it would be the highest since December 2002 and further above the 3-7% target range. Next policy meeting is January 20 and rates are expected to remain steady at 14.0%. After the central bank delivered the expected 100 bp cut to 14.0% at the December 16 meeting, it signaled an end to the easing cycle. However, the damage had already been done as real rates remain deeply negative. Even a highly unlikely emergency rate hike of 15-20 percentage points would be unlikely to stabilize sentiment without external support from the IMF (also highly unlikely).
Israel central bank meets Monday and is expected to keep rates on hold at 0.10%. CPI rose 2.4% y/y in November, near the cycle high of 2.5% in September but still within the 1-3% target range. After announcing an end to QE at the October 7 meeting and flagging potential liftoff in 2022, the central bank left policy unchanged November 22 and said it would continue to intervene as needed to prevent shekel strength. Since that meeting, the shekel is basically flat, which is not bad given how the broader EM FX complex has weakened. For now, it’s steady as she goes for monetary policy but liftoff is likely by Q4.
National Bank of Poland meets Tuesday and is expected to hike rates 50 bp to 2.25%. A couple of analysts look for a larger 75 bp move. December CPI will be reported Friday, with headline inflation expected at 8.3% y/y vs. 7.8% in November. If so, it would be the highest since December 2000 and further above the 1.5-3.5% target range. The central bank just delivered a consensus 50 bp hike to 1.75% at the December 8 meeting, but said future moves would depend on incoming data. Swaps market is pricing in 150 bp of tightening in Q1 followed by 25 bp in Q2, but we think this understates the case as the bank is falling further behind the curve and needs to take more aggressive action.
National Bank of Hungary releases its minutes Wednesday. At the December 14 meeting, it delivered a 30 bp hike to 2.40% vs. 40 bp expected. Next policy meeting is January 25. While it may stick to its 30 bp pace, the bank is falling further behind the curve with inflation running at 7.4% y/y, well above the 2-4% target range. The bank holds its weekly one-week tender Thursday. With the forint still under pressure, the bank is expected to continuing hiking its one-week rate after it hiked 20 bp last week to 4.0%. November PPI will also be reported Thursday. IP and retail sales will be reported Friday, with IP expected at -0.4% m/m vs. 0.3% in October.
ASIA
Singapore reports advance Q4 GDP data Monday. Growth is expected at 2.1% q/q vs. 1.3% in Q3, which would put full year growth at 7.1% vs. -5.4% in 2020. November retail sales will be reported Wednesday. Virus numbers are rising again and are mostly coming from foreign travelers, and so policymakers may have to rethink its current open borders policy that allows quarantine-free travel for the vaccinated from certain countries. Meanwhile, Prime Minister Lee has signaled that the upcoming budget in February will focus on social programs and healthcare, noting “We have seen this need coming for some years. Now that our economy is emerging from Covid-19, we have to start moving on this.”
Caixin reports December manufacturing PMI Tuesday. Headline is expected at 50.0 vs. 49.9 in November. Caixin services and composite PMI readings will be reported Thursday, with services expected at 51.9 vs. 52.1 in November. Last week, official PMI readings were reported, with manufacturing at 50.3 vs. 50.1 in November, non-manufacturing at 52.7 vs. 52.3 in November, the composite steady at 52.2. While the economy appears to be steadying, policymakers have signaled that further stimulus is likely as the focus shifts from structural reforms to promoting growth.
Indonesia reports December CPI Monday. Headline inflation is expected at 1.82% vs. 1.75% in November. If so, it would be the highest since June 2020 but still below the 2-4% target range. Next policy meeting is January 20 and rates are expected to remain steady at 3.5%. Bloomberg consensus sees the policy rate steady through H1, with liftoff seen in H2. The bank has signaled steady policy for now, as downside risks remain in place. Indeed, reports suggest the government is discussing plans to suspend foreign visitors after its first local omicron case was discovered last week.
Philippines reports December CPI Wednesday. Headline inflation is expected at 4.1% y/y vs. 4.2% in November. If so, it would be the lowest since July and nearing the 2-4% target range. Next policy meeting is February 17 and rates are expected to remain steady at 2.0%. Bloomberg consensus sees the policy rate steady through H1, with liftoff seen in H2. Central bank Governor Diokno has signaled that rates are likely to remain on hold for the time being, as price pressures ease and inflation returns to the target range.
Thailand reports December CPI Wednesday. Headline inflation was 2.71% y/y in November, within the 1-3% target range. Next policy meeting is February 9 and rates are expected to remain steady at 0.5%. Bloomberg consensus sees the policy rate steady through 2022, with liftoff seen in early 2023. The economy is starting to recover as pandemic restrictions ease, but the unknown impact of the omicron variant will keep policymakers cautious this year.
