EM FX was mixed last week despite the dollar’s broad-based recovery against the majors. ZAR, MXN, and THB outperformed while HUF, ARS, and RON underperformed. With DM interest rates still rising (RBA and BOE both expected to hike this week), the outlook for EM FX now critically hinges on the pace of EM rate cuts in the coming weeks. Last week, Hungary delivered the expected 100 bp cut while Chile delivered a dovish surprise with its 100 bp cut. As a result, HUF and CLP are likely to remain under pressure. This week in EM, Brazil is expected to start its easing cycle with a 50 bp cut and a more cautious approach could see BRL hold up relatively better. If EM cuts rates too fast, the narrowing differentials with DM would be another headwind for EM FX.
AMERICAS
Mexico reports Q2 GDP Monday. GDP is expected at 0.6% q/q vs. 1.0% in Q1, while the y/y rate is expected at 3.2% vs. 3.7% in Q1. If so, y/y growth would be the slowest since Q2 2022. With growth holding up relatively well due in part to the strong U.S. economy, Banco de Mexico should be in no hurry to cut rates aggressively. At the last policy meeting June 22, it left rates steady but minutes show policymakers felt it was still too early to consider a rate cut. Next meeting is August 10 and no change is expected then. The swaps market is pricing in no easing over the next three months followed by 50 bp over the subsequent three months.
Chile reports June IP and retail sales Monday. IP is expected at -4.0% y/y vs. -4.5% in May while sales are expected at -10.0% y/y vs. -10.5% in May. June GDP proxy will be reported Tuesday and is expected at -1.4% y/y vs. -2.0% in May. The economy remains weak and so the central bank started the easing cycle last Friday with a dovish surprise, cutting rates 100 bp to 10.25% vs. 75 bp expected. The decision was unanimous and the bank warned that “The board estimates that, in the short term, the MPR will accumulate a somewhat stronger reduction than was considered in the Monetary Policy Report’s central scenario, in line with the results of the surveys conducted prior to this meeting.” The swaps market is pricing in 225 bp of easing over the next three months followed by another 200 bp over the subsequent three months.
Colombia central bank meets Monday and is expected to keep rates steady at 13.25%. At the last meeting June 30, it kept rates steady at 13.25% for the first time in nearly two years. Minutes to that meeting showed a cautious outlook, as the bank said inflation was “excessively high” and saw no condition for monetary easing. The bank publishes its quarterly monetary policy report Wednesday and could provide some insight into the timing of the first cut. The swaps market is pricing in 25 bp of easing over the next three months followed by another 150 bp over the subsequent three months.
Brazil reports June IP and July trade data Tuesday. COPOM meets Wednesday and is expected to cut rates 50 bp to 13.25%. The swaps market is pricing in 125 bp of total easing over the next three months followed by another 125 bp over the subsequent three months. With fiscal policy still expansive, we suspect the central bank will be very cautious in its easing cycle. Of note, the 12-month primary balance equal to -0.24% of GDP in June was the first deficit since October 2021, while the 12-month nominal deficit equal to -6.42% of GDP was the biggest since July 2021.
Peru reports July CPI Tuesday. At the last policy meeting July 13, the bank kept rates steady at 7.75% and noted that “We forecast that annual inflation will remain on its downward trend over the next months, being close to the target range at the end of the year and within the range at the start of 2024.” Next meeting is August 10 and no change is expected then. Bloomberg consensus sees 25 bp of easing in Q3 followed by another 75 bp of easing in Q4.
EUROPE/MIDDLE EAST/AFRICA
Czech Republic reports Q2 GDP Monday. GDP is expected at 0.1% q/q vs. 0.0% in Q1, while the y/y rate is expected to remain steady at -0.5%. Czech National Bank meets Thursday and is expected to keep rates steady at 7.0%. At the last meeting June 21, the bank kept rates steady and Governor Michl said that market bets on the timing of easing were “premature” and that rates would remain steady or higher for a longer time. The swaps market is pricing in no easing over the next three months followed by 75 bp over the subsequent three months. June retail sales will be reported Friday. Sales ex-autos are expected at -5.3% y/y vs. -6.1% in May.
Poland reports July CPI Monday. Headline is expected at 11.0% y/y vs. 11.5% in June. If so, it would be the lowest since March 2022 but still well above the 1.5-3.5% target range. At the last policy meeting July 6, the bank kept rates steady at 6.75%. Governor Glapinski said then that the bank had formally ended the tightening cycle but added that there was no discussion of rate cuts at the meeting. Next meeting is September 6 and no change is expected then. The swaps market is pricing in 25 bp of easing over the next three months followed by another 75 bp over the subsequent three months.
Turkey reports July CPI Thursday. Headline is expected at 46.80% y/y vs. 38.21% in June, while core is expected at 54.60% y/y vs. 47.33% in June. If so, it would be the first acceleration for headline since October. The central bank just boosted its inflation forecasts in its latest inflation report last week. Inflation is forecast at 58% for end-2023 vs. 22.3% previously, 33% for end-2024 vs. 8.8% previously, and 15% by end-2025 vs. 5.0% previously. Governor Erkan said the central bank is laying the groundwork for the start of disinflation next year, with CPI expected to peak around 60% in Q2 before improving. This report simply does not justify the bank’s dovish surprise at the last policy meeting July 20, when it hiked rates 250 bp to 17.5% vs. 350 bp expected. The swaps market is pricing in a peak policy rate near 28.75% over the next twelve months and that is simply not enough to stabilize the lira and meet even these updated inflation forecasts.
Hungary reports June PPI Monday. IP and retail sales will be reported Friday. IP is expected at -5.5% y/y vs. -4.6% in May while sales are expected at -9.7% y/y vs. -12.3% in May. No wonder the central bank continues to cut rates aggressively, delivering its third monthly cut of 100 bp in the 1-day deposit rate last week. Once this rate matches the base rate of 13%, both rates will likely be cut then. The swaps market is pricing in 150 bp of cuts in the base rate over the next three months followed by another 225 bp over the subsequent three months.
ASIA
China reports official July PMIs Monday. Manufacturing is expected to remain steady at 49.0 while non-manufacturing is expected to fell two ticks to 53.0. Caixin reports its manufacturing PMI Tuesday and is expected at 50.2 vs. 50.5 in June. Its services and composite PMIs will be reported Thursday. Services is expected at 52.4 vs. 53.9 in June. If so, the Caixin composite PMI would likely fall by over a point from 52.5 in June. With the economy still slowing, more stimulus is likely to be seen in Q3.
Korea reports July trade data Tuesday. Exports are expected at -14.6% y/y vs. -6.0% in June, while imports are expected at -24.8% y/y vs. -11.7% in June. July CPI will be reported Wednesday. Headline is expected at 2.4% y/y vs. 2.7% in June. If so, it would be the lowest since September 2021 and nearing the 2% target. At the last policy meeting July 13, Bank of Korea kept rates steady at 3.5% and pledged to keep policy tight for a “considerable time with an emphasis on ensuring price stability.” The bank acknowledged that while inflation has slowed recently, it’s expected to pick up again “to around the 3% level.” Governor Rhee said the decision was unanimous and added that all six members remained open to a terminal rate of 3.75%. The swaps market is pricing in steady rates over the next three months followed by some risks of a 25 bp hike over the subsequent three months. Next meeting is August 24 and no change is expected then.
Indonesia reports July CPI Tuesday. Headline is expected at 3.11% y/y vs. 3.52% in June, while core is expected at 2.52% y/y vs. 2.58% in June. if so, headline would be the lowest since March 2022 and nearing the center of the 2-4% target range. At the last meeting July 25, Bank Indonesia kept rates steady at 5.75% and Governor Warjiyo stressed 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 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. Next meeting is August 24 and no change is expected then.
Bank of Thailand meets Wednesday and is expected to hike rates 25 bp to 2.25%. At the last meeting May 31, the bank hiked rates 25 bp to 2.0% and maintained a hawkish bias as Assistant Governor Piti said “It’s still appropriate to continue the current strategy that we have adopted.” The bank noted that “The Committee recognizes upside risks to domestic growth, in part owing to forthcoming government economic policies. At the same time, there is a need to monitor the uncertain economic and monetary policy outlook of major economies.” The swaps market is pricing in some odds of one last hike to 2.5% over the next 12 months.
Philippines reports July CPI Friday. Headline is expected at 4.9% y/y vs. 5.4% in June. If so, it would be the lowest since April 2022 but still above the 2-4% target range. At the last policy meeting June 22, the central bank kept rates steady at 6.25% and Governor Medalla said there was very little reason to either hike or cut rates. He said cuts are unlikely in the near future and that the bank needs to see inflation below 4% for two months before it would consider a rate cut. Next meeting is August 17 and no change is expected then.
