EM Preview for the Week of March 26, 2023

March 26, 2023

EM FX was higher across the board last week as the dollar came under broad-based pressure after the FOMC meeting. HUF, MXN, and CLP outperformed while INR, THB, and CNY underperformed. While we do not think the Fed is as dovish as current market pricing, we question why EM and risk assets should rally when the implicit economic outlook is one of sharply slower U.S. growth stemming from ongoing banking sector stresses. Data from China this week is expected to show that the reopening impact is wearing off. A backdrop of slowing global growth coupled with ongoing risk off impulses is not good for EM and so we do not think this current bounce can be sustained.


Brazil reports February current account and FDI data Monday. Central bank minutes will be released Tuesday. The bank’s quarterly inflation report will be released Thursday. February central government budget data and IP will also be reported Thursday. Last week, the bank kept rates steady at 13.75% and maintained a hawkish bias. Ahead of the meeting, the government remained critical of the central bank. Lula sad that a policy rate of 13.75% is “absurd” while adding that policymakers are “irresponsible” for keeping rates high. Finance Minister Haddad said interest rates were “excessively high.” We note that inflation continues to ease but government interference in monetary policy could make the central bank dig in its heels. Markets are pricing in the start of an easing cycle at the June 21 meeting but we should get more insight at the May 3 meeting.

Mexico reports February trade data Monday. Recent export growth has been fueled by non-petroleum exports as the value of oil exports has fallen with the price of oil. Banco de Mexico meets Thursday and is expected to hike rates 25 bp to 11.25%. At the last meeting February 9, the bank delivered a hawkish surprise and hiked rates 50 bp to 11.0% vs. 25 bp expected. Last week, bi-weekly headline CPI slowed to 7.12% y/y while core slowed to 8.15% y/y. If inflation continues to ease, we may be near the end of the tightening cycle. The market is pricing in a peak policy rate near 11.25% but we see risks of a slightly higher rate, especially if the peso continues to weaken.

Colombia central bank meets Thursday and is expected to hike rates 25 bp to 13.0%. However, nearly half the analysts polled by Bloomberg look for a larger 50 bp move. At the last policy meeting January 27, the bank delivered a dovish surprise and hiked rates 75 bp to 12.75% vs. 100 bp expected. Governor Villar said then that “With today’s decision, monetary policy is nearing the stance required to cause inflation to slow to its 3% over the medium term.” He added that the bank hasn’t necessarily ended the tightening cycle but it seems clear to us that we are nearing the end. The market is pricing in a peak policy rate between 13.0-13.25%, followed by the start of an easing cycle over the next six months.

Peru reports March CPI Saturday. Inflation appears to have peaked but remains well above the 1-3% target range. Next central bank policy meeting is April 13 and rates are expected to remain steady at 7.75%. At the last meeting March 9, the bank left rates steady for the second straight month. While it didn’t rule out further hikes then, the bank said it still sees inflation returning to the target range by Q4. Of note, core inflation bears watching as it continues to accelerate.


National Bank of Hungary meets Tuesday and is expected to keep the base rate steady at 13.0%. The 1-day deposit rate has become the de facto policy rate since it was introduced back in October at 18.0%. At the last meeting February 28, the bank said it would keep policy tight for a “prolonged period.” Deputy Governor Virag said “We’ll certainly need to maintain the 18% interest rate level until a trend-like improvement in risk assessment.” The market is pricing in the start of an easing cycle over the next three months, which seems very unlikely. Inflation may have peaked but remains well above the 2-4% target range. Ahead of the decision, Hungary reports Q4 current account data.

Czech National Bank meets Wednesday and is expected to keep rates steady at 7.0%. The bank has kept rates steady since its last 125 bp hike last June. At the last meeting February 2, the bank said it debated the scenario of keeping rates at current levels for longer. Governor Michl said he sees a higher rate path than what markets are pricing. Right now, the market is pricing in the start of an easing cycle over the next three months, which seems very unlikely to us as well. Inflation may have peaked but remains well above the 1-3% target range. Lastly, Michl noted that the strong koruna is helping to tighten monetary conditions.

South African Reserve Bank meets Thursday and is expected to hike rates 25 bp to 7.5%. At the last policy meeting January 26, the bank delivered a dovish surprise and hiked rates 25 bp to 7.25% vs. 50 bp expected. Governor Kganyago said then that the outlook for economic growth appeared even more uncertain than normal as the bank cut its forecast for this year to 0.3% vs. 1.1% previously. He also estimated that ongoing power blackouts will shave an estimated 2 percentage points off of growth this year. As such, we suspect the SARB is nearing the end of its tightening cycle. Ahead of the decision, February PPI, M3, and private sector credit data will be reported. February trade and budget data will be reported Friday.

Poland reports March CPI Friday. Headline is expected at 16.1% y/y vs. 18.4% in February. If so, it would be the lowest since August but still well above the 1.5-3.5% target range. High base effects stemming from last year’s Ukraine invasion should see the y/y rate fall substantially in Q2. Next central bank policy meeting is April 5 and rates are likely to be kept steady at 6.75%. At the last policy meeting March 8, Governor Glapinski said it was too early to discuss a rate cut but that the current level will help move inflation back to its target.


Bank of Thailand meets Wednesday and is expected to hike rates 25 bp to 1.75%. At the last policy meeting January 25, the bank hiked rates 25 bp and Assistant Governor Piti said “The economy is taking off so it’s still appropriate to raise the rate for a while. But how far we will go is the key task for the following meetings.” The market is pricing in a very gradual tightening cycle, with the policy rate seen at 2.25% in three years. This seems too low but we should know more after this week’s meeting.

China reports official March PMI readings Friday. Manufacturing is expected at 51.8 vs. 52.6 in February while non-manufacturing is expected at 54.3 vs. 56.3 in February. If so, the composite should fall significantly from 56.4 in February and would support our view that the benefits (both domestic and global) of reopening have been largely overstated. Caixin PMI readings will be reported next week.

Korea reports February IP Friday. IP is expected at -4.0% y/y vs. -12.7% in January. March trade data will be reported Saturday. Exports are expected at -13.2% y/y vs. -7.5% in February while imports are expected at -6.3% y/y vs. 3.6% in February. Recent data support our view that China reopening is having little impact on regional trade and activity.

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