EM FX was mixed last week despite broad-based dollar strength vs. the majors. COP, MXN and HUF outperformed while MYR, ARS, and ZAR underperformed. There will be several drivers for EM this week. Risk on sentiment due to the debt ceiling deal could lead to some EM gains, but this is likely to be offset by heightened Fed tightening expectations as well as weak Chinese data. Overall, we believe the dollar rally remains intact and so EM FX is likely to remain under pressure near-term.
AMERICAS
Brazil reports April central government budget data Tuesday. A primary surplus of BRL16.8 bln is expected vs. -BRL7.1 bln in March. Consolidated budget data will be reported Wednesday and a primary surplus of BRL21.5 bln is expected vs. -BRL14.2 bln in March. With fiscal reforms in place, markets will be looking for signs of improvement in the budget data in the coming months, which would also allow the central bank to start its long-awaited easing cycle. Markets are currently betting that August 2 is the likely start, as June 21 seems too early. Q1 GDP and May trade data will be reported Thursday. GDP growth is expected at 1.2% q/q vs. -0.2% in Q4, while the y/y rate is expected at 2.9% vs. 1.9% in Q4. April IP will be reported Friday and is expected at -1.7% y/y vs. 0.9% in March.
Chile reports April IP and retail sales Wednesday. IP is expected at -1.3% y/y vs. -5.9% in March, while sales are expected at -8.5% y/y vs. -8.4% in March. April GDP proxy will be reported Thursday and is expected at -0.5% y/y vs. -2.1% in March. The economy appears to be bottoming even as inflation continues to fall. With the central bank likely to start an easing cycle in H2, the growth outlook should improve. Minutes from its May 12 meeting show that the bank saw no evidence yet that inflation ”had been resolved.” Next policy meeting is June 19 and rates are likely to be kept steady at 11.25%. However, markets are pricing in rate cuts over the next three months and will be looking for confirmation from the bank at the June meeting.
Banco de Mexico releases its quarterly inflation report Wednesday. It releases its minutes Thursday. At the May 18 meeting, the bank paused for the first time since it began the tightening cycle in 2021 but said that “In order to achieve an orderly and sustained convergence of headline inflation to the 3% target, it considers that it will be necessary to maintain the reference rate at its current level for an extended period.” It warned that “The inflationary outlook will be complicated and uncertain throughout the entire forecast horizon, with upward risks.” The swaps market sees steady rates for the next three months followed by the start of an easing cycle over the subsequent three months, which seems too soon to us in light of it updated forward guidance. Next policy meeting is June 22 and rates are likely to be kept steady at 11.25% again. However, the forward guidance then will be key.
Peru reports May CPI Thursday. Headline is expected at 7.91% y/y vs. 7.97% in April. If so, it would be the fourth straight month of deceleration to the lowest since March 2022 but still well above eh 1-3% target range. At the last policy meeting May 11, the central bank kept rates steady at 7.75% for the fourth straight month but warned that the tightening cycle was not necessarily over. Next meeting is June 8 and rates are likely to be kept steady again. The market is pricing in the start of an easing cycle in Q3 and so forward guidance at that meeting will be key.
EUROPE/MIDDLE EAST/AFRICA
Turkey President Erdogan has won another term. In the second round vote, incumbent Erdogan won 52.2% of the vote vs. 47.8% for opposition leader Kilicdaroglu. Interestingly, Erdogan promised a new economic team that would have “international credibility.” Yet given his victory at the polls, does he really have any reason to change his unorthodox economic policies? Reports suggest Erdogan may reveal his new cabinet by Friday but we expect very little change in policies going forward, both economic and political. April trade data will be reported Tuesday and the deficit is expected at -$8.8 bln vs. -$8.334 bln in March. if so, the 12-month total would rise to -$120.3 bln, the highest on record. The twin deficits will become increasingly harder to finance unless the central bank is allowed to hike rates, which seems unlikely. Q1 GDP will be reported Wednesday and growth is expected at 0.3% q/q vs. 0.9% in Q4, while the y/y rate is expected to remain steady at 3.5%.
South Africa reports April money and private sector credit and budget data Tuesday. Last week, the bank hiked rates 50 bp to 8.25% by a unanimous decision and saw no relaxation of policy until the CPI trajectory changes. It warned that further rand weakness was likely and raised its inflation forecasts modestly. Its model now sees the policy rate at 7.63% at end-2023 vs. 7.13% previously, at 7.16% at end-2024 vs. 6.94% previously, and at 6.99% at end-2025 vs. 6.91% previously. Next policy meeting is July 20 and the swaps market is pricing in a 25 bp hike to 8.5%. We see risks of a hawkish surprise but for now, higher rates have done little to support the rand. Looking further ahead, the market is pricing in a peak policy rate near 9.0% over the next 12 months. Trade data will be reported Wednesday.
Poland reports May CPI Wednesday. Headline is expected at 13.4% y/y vs. 14.7% in April. If so, it would be the lowest since April 2022 but still well above the 1.5-3.5% target range. At the last policy meeting May 10, the central bank kept rates steady at 6.75%. Next meeting is June 6 and rates are likely to be kept steady then. Governor Glapinski said last week that he hopes that rate cuts are possible in Q4, as he sees inflation easing significantly by year-end. The market is pricing in the start of an easing cycle over the next 3-6 months, which seems too soon given how high inflation remains.
ASIA
Korea reports April IP Wednesday. It is expected at -7.9% y/y vs. -7.6% in March. May trade data will be reported Thursday. Exports are expected at -15.1% y/y vs. -14.3% in April, while imports are expected at -14.2% y/y vs. -13.3% in April. Q1 GDP and May CPI data will be reported Friday. Headline inflation is expected at 3.3% y/y vs. 3.7% in April. If so, it would be the lowest since but still above the 2% target. Next BOK meeting is July 13 and rates are likely to be kept steady at 3.5%. The market sees some risk of one last 25 bp hike but we believe the tightening cycle has ended. GDP growth is expected at 0.3% q/q vs. 0.3% in Q4, while the y/y rate is expected to remain steady at 0.8%. So far, China reopening has had very little impact on the regional exporters such as Korea.
China reports official May PMI readings Wednesday. Manufacturing is expected at 49.5 vs. 49.2 in April and non-manufacturing is expected at 55.0 vs. 56.4 in April. If so, the composite would likely fall over a full point from 54.4 in April to the lowest since January, when reopening first took effect. Caixin reports its manufacturing PMI Thursday and is expected to remain steady at 49.5. With the economy clearly softening , we believe the PBOC will ease again in the coming months and this should translate into further yuan weakness. USD/CNY is approaching a key level near 7.0845 as a break above would set up a test of the November cycle high near 7.3275.
Bank of Thailand meets Wednesday and is expected to hike rates 25 bp to 2.0%. At the last meeting March 19, the bank hiked rates 25 bp to 1.75% and signaled further hikes as Assistant Governor Piti said “With all the data that we have now, we think the rate normalization should continue.” Forecasts for growth, headline inflation, and core inflation this year were all cut by a tick to 3.6%, 2.9%, and 2.4%, respectively, while the forecast for headline inflation next year was raised to 2.4% vs. 2.0% previously. The market is pricing in a policy rate between 2.0-2.25% over the next 12 months. Q1 current account data will also be reported Wednesday.
