EM Preview for the Week of April 3, 2022

April 03, 2022

Despite the dollar’s rebound against the majors last week, EM FX was still able to get more traction. RUB, PEN, and HUF were the best performers while ZAR, ARS, and CLP were the worst. With U.S. yields still rising in the aftermath of Friday’s jobs report, we expect the dollar to continue gaining and EM FX may succumb to the deteriorating fundamental backdrop.

AMERICAS

Colombia central bank minutes will be released Monday. At last week’s meeting, the central bank delivered a dovish surprise and hiked 100 bp to 5.0% vs. 150 bp expected. The vote was 5-2 with the dissents in favor of a 150 bp move. Governor Villar said the bank needs to be cautious given uncertainty. March CPI will be reported Tuesday. Headline is expected at 8.49% y/y vs. 8.01% in February. If so, this would be the highest headline reading since July 2016 and further above the 2-4% target range. Next policy meeting is April 29 and another 100 bp hike to 6.0% seems likely. Swaps market sees the policy rate peaking near 8.75% over the next 12 months.

Chile reports March trade data Thursday. CPI will be reported Friday. Headline is expected at 8.6% y/y vs. 7.8% in February. If so, this would be the highest headline reading since November 2008 and further above the 2-4% target range. Last week, the central bank delivered a dovish surprise with a 150 bp hike to 7.0% vs. 200 bp expected. The bank noted more pessimism in consumer and business confidence and that activity is on a downward trend compared to last year. Looking ahead, the bank said that future hikes will be smaller under its base case scenario. Despite the dovish tilt, swaps market now sees the policy rate peaking near 9.5% over the next 3 months rather than 9.0% over the next 6 months that was seen at the start of last week.

Mexico reports March CPI Thursday. Headline is expected at 7.35% y/y vs. 7.28% in February, while core is expected at 6.71% y/y vs. 6.59% in February. If so, this would be the highest headline reading since December and further above the 2-4% target range. Banco de Mexico minutes will also be released Thursday. At that March 24 meeting, the bank delivered the expected 50 bp hike to 6.5%. Swaps market is pricing in a peak policy rate of 9.25% over the next 12 months. The Finance Ministry just cut its growth forecast for 2022 to 3.4% vs.4.1% in December, with inflation expected to slow to 5.5% by the end-2022. For 2023, growth is forecast at 3.5% with inflation expected to slow to 3.3% by end-2023.

Peru central bank meets Thursday and is expected to hike rates 50 bp to 4.5%. CPI rose 6.82% y/y in March, the highest since August 1998 and further above the 1-3% target range. The bank started the tightening cycle with a 25 bp hike to 0.5% back in August but has since hiked 50 bp at every meeting. We expect this pace to be maintained. Bloomberg consensus sees the policy rate peaking near 5.25% by year-end but we see upside risks. Meanwhile, Finance Minister Graham announced targeted tax cuts in response to more protests by farmers and truckers. The government announced a fuel tax cut and will propose a bill to exempt basic food items like chicken, eggs, flour, and noodles from sales taxes.

Brazil reports February consolidated budget and current account data sometime this week. Last week, the central government deficit came in at -BRL20.6 bln vs. -BRL19.3 bln expected and a BRL76.5 bln surplus in January. March IPCA inflation will be reported Friday. Headline is expected at 11.00% y/y vs. 10.54% in February. If so, this would be the highest headline reading since November 2003 and further above the 2-5% target range. Next COPOM meeting is May 4 and a 100 bp hike to 12.75% is expected. Swaps market is pricing in a peak policy rate of 13.0% over the next 6 months.

EUROPE/MIDDLE EAST/AFRICA

Turkey reports March CPI Monday. Headline is expected at 61.50% y/y vs. 54.44% in February, while core is expected at 47.10% y/y vs. 44.05% in February. If so, this would be the highest headline reading since and further above the 3-7% target range. It will only get worse after announced hikes to natural gas and electricity prices on Friday. Swaps market and Bloomberg consensus both see the policy rate rising over the next 3 months. Despite higher inflation, the lira has remained fairly stable in recent weeks, more from the lack of any foreign participation rather than from any improvement in the fundamentals.

Hungary reports February IP Tuesday. It is expected at 1.8% y/y WDA vs. 7.1% in January. Retail sales will be reported Wednesday and are expected at 5.8% y/y vs. 4.1% in January. Central bank minutes will also be reported Wednesday. At that March 22 meeting, the bank hiked the base rate 100 bp to 4.4%, as expected. Trade data will be reported Thursday. March CPI will be reported Friday. Headline is expected at 8.8% y/y vs. 8.3% in February. If so, this would be the highest headline reading since April 2007 and further above the 2-4% target range. Next policy meeting is April 26 and another 100 bp hike to 5.4% seems likely then. Swaps market sees the base rate peaking around 5.5% over the next 12 months but we still see upside risks. Prime Minister Orban won a fourth straight term as his Fidesz party won an overwhelming two thirds majority in parliament in weekend elections.

National Bank of Poland meets Wednesday and is expected to hike rates 50 bp to 4.0%. However, nearly half of the 28 analysts polled by Bloomberg look for a larger 75 bp move. CPI rose a whopping 10.9% y/y in March, the highest since July 2000 and further above the 1.5-3.5% target range. Minutes for the March 8 meeting will be released Friday. At that meeting, the bank delivered a hawkish surprise with a 75 bp hike to 3.5% vs. 50 bp expected. Swaps market sees the policy rate peaking between 4.75-5.00% over the next 12 months but we still see upside risks.

Russia reports March CPI Wednesday. Headline is expected at 17.00% y/y vs. 9.18% in February, while core is expected at 17.25% y/y vs. 9.74% in February. If so, this would be the highest headline reading since March 2015 and further above the 4% target. Q4 GDP will be reported Friday, with growth expected at 4.8% y/y vs. 4.3% in Q3. The economy is likely to contract in Q1 and some EU nations are pushing for more sanctions against Russia in response to reports of war crimes in Ukraine. However, there are reports that Germany is opposed to sanctions on Russia’s energy sector and maritime trade. U.S. Secretary of State Blinken said the ruble’s rebound is fueled by “a lot of manipulation” by Russia, noting that “People are being prevented from unloading rubles. That’s artificially propping up the value. That’s not sustainable. So I think you’re going to see that change.”

ASIA

Singapore reports Q1 GDP sometime this week. GDP is expected to grow 3.3% y/y vs. 6.1% in Q4. The Monetary Authority of Singapore meets on the same day. February headline inflation came in a tick higher than expected at 4.3% y/y vs. 4.0% in January, the highest headline reading since February 2013. While the MAS does not have an explicit inflation target, rising price pressures are likely to lead to another round of tightening at its April policy meeting. At the last meeting in October, the MAS tightened with an increase in the slope of its S$NEER trading band and we expect the same this time around. February retail sales will be reported Tuesday. Headline sales are expected to come in at 5.6% y/y vs. 11.8% in January.

Korea reports March CPI Tuesday. Headline is expected to rise three ticks to 4.0% y/y while core is expected to rise one tick to 3.3% y/y. If so, this would be the highest headline reading since December 2011 and further above the 2% target. At the last policy meeting February 24, the central bank delivered a hawkish hold as it raised its inflation forecast for 2022 to 3.1% vs. 2.0% previously and for 2023 to 2.0% vs. 1.7% previously. That was Lee’s last meeting as Governor and so it will be up to his successor to follow through. Swaps market sees the policy rating peaking around 3.0% over the next 24 months. Next BOK policy meeting is April 14 and another 25 bp hike to 1.5% seems likely then. February current account data will be reported Friday.

Philippines reports March CPI Tuesday. Headline is expected at 3.7% y/y vs. 3.0% in February. If so, this would be the highest headline reading since November and back near the top of the 2-4% target range. At the last policy meeting March 24, the central bank delivered a dovish hold. Governor Diokno said “The Monetary Board sees scope to maintain the BSP’s policy settings in order to safeguard the momentum of economic recovery amid increased uncertainty even as it continues to develop its plans for the gradual normalization of its extraordinary liquidity measures.” He added that the bank stands ready to address second-round inflation but stressed that sustaining the economic recovery remains its priority. Bloomberg consensus sees steady rates through H1, with liftoff seen in Q3. We believe that is still the most likely timeframe. Next policy meeting is May 19 and rates are likely to remain steady. Bloomberg consensus sees liftoff in Q3. February trade data will be reported Friday.

Thailand reports March CPI Tuesday. Headline is expected at 5.55% y/y vs. 5.28% in February, while core is expected to remain steady at 1.80% y/y. If so, this would be the highest headline reading since September 2008 and further above the 1-3% target range. Next policy meeting is June 8. Last week, the Bank of Thailand delivered a dovish hold. Even though the bank raised its inflation forecasts for this year to 4.9% from 1.7% in December, Assistant Governor Piti said “It’s not worth weighing on the economy to bring inflation back within the target. We don’t want to use a tool that has wide impact now to deal with short-term problem.” Piti added that inflation may exceed 5% in Q2 and Q3 before slowing back within its 1-3% target range next year and that inflation expectations remain within the target range over the medium term. Lastly, Piti said the BOT will consider whether it needs to hike rates once the output gap starts to narrow, which it expects to happen late next year. Bloomberg consensus sees liftoff in early 2023.

Caixin reports March services and composite PMIs Wednesday. Services PMI is expected at 49.7 vs. 50.2 in February. Last week, Caixin manufacturing PMI came in at 48.1 vs. 49.9 expected and 50.4 in February and so the Caixin composite PMI is likely to slip below 50 vs. 50.1 in February. Of note, the official manufacturing PMI came in at 49.5 vs. 49.8 expected and 50.2 in February and non-manufacturing PMI came in at 48.4 vs. 50.3 expected and 51.6 in February, which dragged the official composite PMI down to 48.8 vs. 51.2 in February. Given that the lockdowns have spread and intensified, we expect April readings to get even worse. The economy is clearly slowing from the latest pandemic wave and the growth target for this year of “around 5.5%” looks increasingly difficult to achieve and should bring more stimulus measures soon, both fiscal and monetary. We believe central bank divergence and narrowing interest rate differentials will continue to weaken the yuan.

Reserve Bank of India meets Friday and is expected to keep the repo rate steady at 4.0%. CPI rose 6.07% in February, the highest since June 2021 and above the 2-6% target range. At the last policy meeting February 10, the central bank delivered a dovish hold. Governor Das note “Private consumption, the mainstay of domestic demand, continues to trail its pre-pandemic level. The persistent increase in international commodity prices, surge in volatility of global financial markets and global supply bottlenecks can exacerbate risks to the outlook.” Next policy meeting is May 19. While another dovish hold seems likely, the bank should start inching towards hiking rates. Bloomberg consensus sees Q3 liftoff and so the RBI’s dovish stance will eventually be tested.  

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