EM Preview for the Week of March 17, 2024

March 17, 2024

Win Thin

EM FX was mostly softer last week as the dollar mounted a broad-based recovery on the back of higher-than-expected inflation data. CLP, MXN, and COP outperformed while THB, KRW, and TRY underperformed. It's a jam-packed week ahead with policy rate announcements by the Fed, BOJ, RBA, BOE, Norges Bank, and SNB. Additionally, rate cuts are expected in Brazil, Colombia, Mexico, and Czech Republic. The strong dollar and narrowing interest rate differentials between DM and EM are likely to continue weighing on EM FX.

AMERICAS

Brazil COPOM meets Wednesday and is expected to cut rates 50 bp to 10.75%. If so, this would amount to 200 bp of cumulative rate cuts since the easing cycle started in August 2023. At the last COPOM meeting, the central bank cut rates 50 bp to 11.25% and said that pace of easing would be maintained over the next meetings. Headline consumer inflation is on a solid disinflationary path and at the upper end of the bank’s 1.5% to 4.5% inflation target range. Of note, the swaps market is pricing in 150 bp of total easing over the next six months that would see the policy rate bottom near 9.75%.

Banco de Mexico meets Thursday and is expected to cut rates 25 bp to 11.0%. If so, it would be the first cut after keeping the rate on hold at 11.25% since August 2023. At the last meeting February 8, Banco de Mexico kept rates steady at 11.25% but removed the phrase that it would hold rates “for some time” and instead said that it will make any decisions “depending on available information” at its next meetings. Since then, core inflation eased to 4.6% y/y, the lowest since June 2021. Mid-March CPI will be reported Friday. Headline is expected at 4.48% y/y vs. 4.35% previously, while core is expected at 4.63% y/y vs. 4.66% previously. The swaps market is pricing roughly 175 bp of rate cuts over the next 12 months followed by another 145 bp over the subsequent 12 months.

Colombia central bank meets Friday and is expected to cut rates 50 bp to 12.25%. At the last meeting January 31, the bank delivered a hawkish surprise and cut rates 25 bp to 12.75% vs. 50 bp expected. Governor Villar said it would ease “in a cautious way to control the risks that a more accelerated reduction will lead to a situation in which the process has to be slowed down or even eventually reversed.” Since then, headline CPI inflation fell to a two-year low of 7.74% y/y and core CPI inflation fell to a 16-month low of 9.20%. There are some risks that the central bank sticks to a more modest 25 bp pace as inflation remains well above the 2-4% target range. The swaps market is pricing 450 bp of rate cuts over the next 12 months.

EUROPE/MIDDLE EAST/AFRICA

South Africa reports February CPI Wednesday. Headline is expected at 5.5% y/y vs. 5.3% in January, while core is expected at 4.9% y/y vs. 4.6% in January. If so, headline would accelerate for the second straight month and nearing the top of the 3-6% target range. At the last meeting January 25, the bank kept rates steady at 8.25%. However, it was a hawkish hold as Governor Kganyago warned “At the current repurchase rate level, policy is restrictive, consistent with the inflation outlook and the need to address rising inflation expectations. Serious upside risks to the inflation trajectory from global and domestic sources are evident.” Next meeting is March 27, and no change is expected. Indeed, the swaps market is pricing in steady rates over the next six months followed by 25 bp of easing over the subsequent six months.

Czech National Bank meets Wednesday and is expected to cut rates 50 bp to 5.75%. Vice Governor Eva Zamrazilova has cautioned that she’s “not considering any jumbo cuts,” suggesting a larger move is unlikely. At the last policy meeting February 8, the Czech National Bank delivered a dovish surprise and cut rates 50 bp to 6.25% vs. 25 bp expected. Since then, inflation fell to the bank’s 2% target in February. The swaps market is pricing in 225 bp of rate cuts over the next 12 months followed by another 75 bp over the subsequent 12 months that would see the policy rate bottom around 3.25%. Bottom line: real rates will likely remain positive and supportive of CZK.

Turkey central bank meets Thursday and is expected to keep rates steady at 45.0%. There are some risks of a hawkish surprise as inflation remains red hot. Headline inflation unexpectedly quickened to 67.07% in February, the highest since November 2022, and core CPI inflation surged to a new high of 72.89%. Turkey’s OIS curve now implies 225-250 bp of rate hikes over the next three months. Regardless, real rates will remain deeply negative and be a huge drag on TRY. At the last meeting February 22, the bank kept rates steady at 45.0%. This was the first meeting led by new Governor Karahan and the bank stressed that it would tighten policy “in case a significant and persistent deterioration in inflation outlook is anticipated.”

ASIA

China reports January-February IP, retail sales, property investment, and fixed asset investment Monday. IP is expected at 5.3% y/y vs 6.8% in December, while sales are expected at 5.6% y/y vs. 7.4% in December. Commercial banks set their Loan Prime Rates Wednesday. The 1- and 5-year LPRs are expected to remain steady at 3.45% and 3.95%, respectively. Last week, the PBOC kept its key 1-year MLF at 2.5% but drained liquidity for the first time since November 2022. Monetary policy has pretty much reached the limits of what it can do in this deflationary environment and so any further easing is likely to be modest. Bottom line: the 5% growth target for this year will be very difficult to meet.

Bank Indonesia meets Wednesday and is expected to keep rates steady at 6.0%. At the last meeting February 21, the bank kept rates steady at 6.0%, as expected. Governor Warjiyo said rates would be kept steady for “a while” and noted that the bank will likely assess in H2 if there any room for a rate cut. Warjiyo added that with the Fed unlikely to cut rates until H2, rising UST yields are putting pressure on EM currencies, implying limited scope for BI to cut rates anytime soon. Bloomberg consensus sees steady rates through H1 followed by 50 bp of easing in Q3 followed by another 25 bp in Q4. Rates are seen bottoming at 4.75% in 2025.

Taiwan reports February export orders Wednesday. Orders are expected at 1.3% y/y vs. 1.9% in January. The central bank meets Thursday and is expected to keep rates steady at 1.875%. At the last meeting December 14, the bank kept rates steady at 1.875% and said that the current policy rate will encourage the stable development of the economy whilst warning that it is monitoring the downside risks to growth from China’s slowing economy. Lastly, Governor Yang said that the central bank will not necessarily follow the Fed in lowering rates. The market is pricing in steady rates over the next three years, with some risk of another 12.5 bp rate hike over the next 12 months.

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