EM FX was mostly softer last week as the dollar mounted a broad-based recovery after weeks of relentless selling. COP, ZAR, and THB outperformed while TRY, HUF, and CZEK underperformed. The Fed is widely expected to hike rates 25 bp this week and should deliver a hawkish message to the markets, as U.S. data continue to surprise to the upside. The dollar rebound should continue this week even as the backdrop for EM FX remains challenging. To wit, both Chile and Hungary are expected to cut rates this week in an effort to boost their slowing economies, and the eroding interest rate differentials are likely to weigh on their currencies.
AMERICAS
Mexico reports mid-July CPI Monday. Headline is expected at 4.77% y/y vs. 4.93% previously, while core is expected at 6.73% y/y vs. 6.86% previously. If so, headline would be the lowest since March 2021 but still above the 2-4% target range. At the last policy meeting June 22, Banco de Mexico kept rates steady at 11.25% and reiterated that “To achieve the orderly and sustained convergence of inflation to its 3% target, the board considers that it will be necessary to keep the interest rate at its current level for a prolonged period.” Next meeting is August 10 and no change is expected then. The market is pricing in some odds of a cut at the September 28 meeting but we believe November 9 is more likely. Looking ahead, the swaps market is pricing in 50 bp of total easing over the next six months. May GDP proxy will be reported Tuesday and is expected at 3.50% y/y vs. 2.51% in April. June trade data will be reported Thursday.
Brazil reports mid-July IPCA inflation Tuesday. Headline is expected at 3.26% y/y vs. 3.40% in mid-July. If so, it would be the lowest since mid-September 2020 and firmly near the center of the 1.75-4.75% target range. With inflation under control, markets are looking for the start of an easing cycle with a 50 bp cut to 13.25% at the August 2 COPOM meeting. Looking ahead, the swaps market is pricing in 100 bp of easing over the next three months followed by another 125 bp of easing over the subsequent three months. June current account and FDI data will be reported Wednesday. June central government budget data will be reported Friday, with a primary deficit of -BRL44.4 bln expected vs. -BRL45.0 bln in May.
Chile central bank meets Friday and is expected to cut rates 75 bp to 10.5%. However, the market is split. Of the 12 analysts polled by Bloomberg, 2 see a 100 bp cut, 7 see 75 bp, and 3 see 50 bp. At the last policy meeting June 19, the bank kept rates steady at 11.25% but the minutes opened the door to easing by noting that “All board members agreed that the recent evolution of the economy was going in the required direction. If those trends persist, the bank will start a rate cut cycle in the short term.” Since that meeting, real sector data came in weaker than expected while June CPI came in much lower than expected. Looking ahead, the swaps market is pricing in 200 bp of easing over the next three months followed by another 200 bp over the subsequent three months. Such an aggressive easing cycle would surely weigh on the peso.
EUROPE/MIDDLE EAST/AFRICA
Bank of Israel releases its minutes Monday. At the July 10 meeting, the bank kept rates steady at 4.75% and was the first hold since it started the tightening cycle in April 2022 with a 25 bp hike to 0.35%. However, Governor Yaron warned that “We are in an environment of great uncertainty, and there are several upside risks to inflation pressures. It is certainly possible that we will need to increase the interest rate going forward, if we see evidence that the inflation environment is not moderating at a suitable pace.” The shekel has come under some pressure in recent days as political risks rise. The Knesset is scheduled to vote on the controversial judicial reforms Monday even as popular protests intensify. Adding to the uncertainty, Prime Minister Netanyahu had a pacemaker installed over the weekend.
National Bank of Hungary meets Tuesday and is expected to keep the base rate steady at 13.0%. However, it is likely to cut its 1-day deposit rate 100 bp to 15.0% this week following similar cuts in May and June. The bank’s implied aim is to cut this rate by 100 bp per month until it converges with the 13% base rate. Furthermore, the swaps market is pricing in 125 bp of easing in the base rate over the next three months followed by another 250 bp over the subsequent three months. Note that the forint is the fourth best performing EM currency YTD but the early easing cycle has led to increasing underperformance so far in H2.
Turkey central bank releases its quarterly inflation report Thursday. We believe inflation forecasts will have to be raised from the May report that saw 22.3% at end-2023, 8.8% at end-2024, and 5.0% by end-2025. When all is said and done, this report will have a tough time justifying the bank’s dovish surprise last week. The swaps market is pricing in a peak policy rate near 28.0% over the next twelve months and that is not enough to stabilize the lira and meet these inflation forecasts. Turkey then reports June trade data Friday. A deficit of -$5.4 bln is expected vs. -$12.53 bln in May. If so, the 12-month total would fall to -$119.4 bln vs. -$122.2 bln and would be the first drop since October 2021. We are skeptical whether the improvement can be sustained given the central bank’s reluctance to tighten policy more aggressively.
ASIA
Thailand reports June trade data sometime this week. Exports are expected at -6.3% y/y vs. -4.6% in May, while imports are expected at -7.5% y/y vs. -3.4% in May. June manufacturing production will be reported Thursday and is expected at -3.25% y/y vs. -3.14% in May. The economy continues to recover but it risks being derailed by rising political tensions after the military-dominated Senate blocked Pita’s candidacy. His Move Forward Party will reportedly step aside and allow its coalition partner Pheu Thai Party to submit a candidate for Prime Minister. The vote will be held Thursday but we suspect the Senate will reject anyone that’s nominated from the party that’s the successor to Thaksin’s Thai Rak Thai Party. If so, expect protests and social unrest to pick up.
Malaysia reports June CPI Monday. Headline is expected at 2.4% y/y vs. 2.8% in May. If so, headline would be the lowest since April 2022. While Bank Negara does not haven an explicit inflation target, falling price pressures should allow it to maintain steady policy at the next meeting September 7. At the last meeting July 6, the bank kept rates steady at 3.0% after delivering a hawkish surprise at the previous meeting May 3. The bank said this month that the economy grew more moderately in recent months and warned 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 Bank Negara said that “In light of the continued strength of the Malaysian economy, the MPC also recognizes the need to ensure that the stance of monetary policy is appropriate to prevent the risk of future financial imbalances.” We believe the tightening cycle is over but the swaps market sees some risk of one more hike over the next year.
Singapore reports June CPI Monday. Headline is expected at 4.4% y/y vs. 5.1% in May, while core is expected at 4.2% y/y vs. 4.7% in May. If so, headline would be the lowest since February 2022 and core would be the lowest since May 2022. While the MAS does not haven an explicit inflation target, falling price pressures should allow it to maintain steady policy at the next meeting in October. Indeed, the market is pricing in steady policy over the next twelve months followed by the start of an easing cycle in the subsequent twelve months. June IP will be reported Wednesday and is expected at -6.0% y/y vs. -10.8% in May.
Taiwan reports June IP Monday. IP is expected at -16.49% y/y vs. -15.73% in May. Q2 GDP data will be reported Friday. Growth is expected at 0.9% y/y vs. -2.9% in Q1. If so, it would be the first quarter of y/y growth since Q3. Last week, June export orders came in much weaker than expected at -24.9% y/y, suggesting little relief to the economy over the next six months. Of note, the swaps market is pricing in steady policy over the next twelve months followed by the start of an easing cycle in the subsequent twelve months.
Bank Indonesia meets Tuesday and is expected to keep rates steady at 5.75%. At the last meeting June 22, the bank kept rates steady at 5.75% and Governor Warjiyo stressed that policymakers are focused on managing the rupiah to prevent imported price pressures. Bloomberg consensus sees the start of an easing cycle with 25 bp in Q4 followed by another 25 bp in Q2, suggesting a very cautious stance. 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.
