EM Preview for the week of September 26, 2021

September 26, 2021

EM FX is coming off another rough week as broad-based dollar strength continued. RUB and PEN were able to eke out small gains last week, but the rest of EM was under water and the worst performers were TRY, ZAR, PHP, and CLP. Rising U.S. yields are another factor hurting EM, with the 10-year trading near 1.45%. If U.S. rates continue to rise, EM FX is likely to remain under pressure this week.


Mexico reports August trade data Monday. A deficit of -$1.085 bln is expected vs. -$4.063 bln in July. Banco de Mexico meets Thursday and is expected to hike rates 25 bp to 4.75%. CPI rose a higher than expected 5.87% y/y in mid-September, and it appears inflation is accelerating again after a couple months of decelerating. As such, the bank should burnish its credibility by delivering a third straight hike this week. Bloomberg consensus sees another 25 bp of tightening in Q4, followed by another 25 bp each in Q1 and Q2 that takes the policy rate to 5.5% by mid-2022. Another 25 bp hike is seen in Q1 2023.

Brazil central bank minutes will be released Tuesday. COPOM delivered a 100 bp hike to 6.25% at last week’s meeting and promised a similar move at the next meeting October 27. The minutes may provide some more clarity on the length of the tightening cycle. Our call is that the bank makes several more hikes and that the policy rate tops out around 8.5-9.0%. Brazil reports August consolidated budget data Wednesday, where a primary deficit of -BRL11.8 bln is expected vs. -BRL10.3 bln in July. The central bank releases its quarterly inflation report Thursday. September trade data will be reported Friday.

Chile reports August unemployment, retail sales, and IP Thursday. All are expected to show continued strength. With the economy rebounding strongly and inflation rising, the bank delivered a larger than expected 75 bp hike to 1.5% at its August 31 policy meeting. After that move, the bank released its quarterly inflation report and boosted its 2021 macro forecasts significantly. GDP is expected to grow 10.5-11.5% vs. 8.5-9.5% previously, while inflation is expected to accelerate to 5.7% in December, nearly double the 3% target. Next policy meeting is October 13 and another 75 bp hike seems likely then.

Colombia central bank meets Thursday and is expected to hike rates 25 bp to 2.0%. Rates have been on hold since the last 25 bp cut back in September 2020. CPI rose 4.44% y/y in August, the highest since April 2017 and above the 2-4% target range. With the economy recovering, it’s time to start a tightening cycle. Bloomberg consensus sees another 50 bp of tightening in Q4, followed by another 50 bp each in Q1, Q2, and Q3 that takes the policy rate to 4.0% at end-2022. Another 50 bp is seen in Q1 2023.


South Africa reports August PPI, trade, budget, money, and credit data Thursday. M3 is expected to rise 2.0% y/y vs. 1.93% in July, while private sector credit is expected to rise 1.0% y/y vs. 0.61% in July. PPI is expected to rise 7.2% y/y vs. 7.1% in July. Last week, SARB left rates steady at 3.5% but the forward guidance was unexpectedly hawkish. The bank’s model still shows a 25 bp hike in Q4 followed by quarterly hikes over the course of 2022 and 2023. The problem here is that no one really believes SARB can hike rates that aggressively. Indeed, the bank gave itself an out by saying future policy remains "data-dependent." The only policy meeting left this year is November 18 and we would be very surprised if it hikes then as its model suggests.

Turkey reports August trade data Thursday. A deficit of -$4.3 bln is expected vs. -$4.28 ln in July. The external accounts no longer matter as much after the central bank last week unexpectedly cut rates 100 bp to 18.0%. USD/TRY made another new high today just above 8.86 and further losses seem likely in the coming days. The bank can continue to make tweaks to reserve requirements and such to help support the lira but really, the only thing that can turn the currency around is the return of foreign investors and that's not happening anytime soon.

Czech National Bank meets Thursday and is expected to hike rates 50 bp to 1.25%. The bank has hiked by 25 bp in each of the past two meetings. At the last meeting August 5, the vote was split 4-3, with 1 dissent in favor of a 50 bp hike and 2 dissents in favor of no hike. However, several reportedly considered a 50 bp move. CPI rose 4.1% y/y in August, the highest since November 2008 and well above the 1-3% target range.

Poland reports September CPI Friday. Headline inflation is expected to remain steady at 5.5% y/y. If so, it would remain well above the 1.5-3.5% target range. At the last policy meeting September 8, the bank delivered a dovish hold, with Governor Glapinski warning that tightening would be “very risky” now. He said the pandemic continues to cloud the outlook, making it too early to remove stimulus. Next policy meeting is October 6 and rates are expected to remain steady at 0.10%.


Bank of Thailand meets Wednesday and is expected to keep rates steady at 0.50%. At the last meeting August 4, the bank delivered a dovish hold. It was a 4-2 vote, the first split since May 2020 with the two dissents in favor of a 25 bp cut. Assistant Governor Titanun said “This round of the pandemic will affect the economy both this year and next year. The impact is greater than what we forecast, and the downside risk remains significant.” We expect rates are likely to remain on hold through 2022, with risks of further backdoor easing via macroprudential measures. After the August dissent, however, we cannot rule out another rate cut. Earlier that day, Thailand reports August manufacturing production. August trade data will be reported Thursday.

Korea reports August IP Thursday. It is expected to fall -0.5% m/m vs. 0.4% in July. September trade data will be reported Friday. Exports are expected to rise 10.8% y/y vs. 34.8% in August, while imports are expected to rise 26.8% y/y vs. 44.0% in August. If so, this would be the slowest export growth since February. Slowing mainland growth is sure to impact the regional exporters. However, concerns about financial stability led the Bank of Korea to start the tightening cycle with a 25 bp hike in August. Next policy meeting is October 12 and rates are expected to remain steady at 0.75%.

China report official September PMI readings Thursday. Manufacturing is expected at 50.2 vs. 50.1 in August, while non-manufacturing is expected at 50.8 vs. 47.5 in August. If so, the composite should rise from 48.9 in August. Caixin also reports its manufacturing PMI that same day and is expected at 49.5 vs. 49.2 in August. Despite some possible signs of stabilization, the economy remains vulnerable and so we expect another RRR cut in the coming weeks. However, market focus shifted from economic recovery to financial stability, as the Evergrande saga is likely to drag on for several weeks still.

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