EM FX turned in a mixed performance last week as markets struggle for direction. ZAR, CLP, and MXN were the best performers while RUB, COP, and INR were the worst. We expect divergences within EM to continue. The global growth outlook remains supportive for EM, but rising US rate are a growing headwind. Further complicating things for EM FX is the rising dollar, which is expected to continue gaining in Q2.
AMERICAS
Colombia reports March CPI Monday. Inflation is expected at 1.45% y/y vs. 1.56% in February. If so, it would be a new all-time low and still below the 2-4% target range. Next policy meeting is April 30 and no change is expected then. Central bank minutes will also be released Monday. Consensus sees potential for one last cut in Q2 and then steady rates through much of 2021, with odds of a hike rising as we move into Q4 and beyond. We concur. High oil prices should help the economy rebound quickly this year.
Chile reports March trade Wednesday. CPI will be reported Thursday. Inflation is expected at 3.0% y/y vs. 2.8% in February. If so, it would be back at the center of the 2-4% the target range. Next policy meeting is May 13. The bank just delivered a dovish hold last week, stressing that the economy requires “highly expansive” monetary policy and pledging not to hike rates until the recovery strengthens. Consensus sees steady rates through much of 2021, with odds of a hike rising as we move into Q4 and beyond. We concur. Chile’s vaccination program is amongst the best and along with high copper prices , will allow the economy to rebound quickly this year.
Mexico reports March CPI Thursday. Inflation is expected at 4.67% y/y vs. 3.76% in February. If so, it would be the highest since December 2018 and above the 2-4% target range for the first time since last October. Banxico minutes will also be released Thursday. At that March 25 meeting, rates were left steady at 4.0% after a 25 bp cut at the February 11 meeting. Next policy meeting is May 13. If inflation remains above target, then we see rates on hold then. Consensus sees potential for one last cut in 2021 and then steady rates through much of 2022. We concur. February IP will be reported Friday.
Peru central bank meets Thursday and is expected to keep rates steady at 0.25%. Inflation was 2.60% y/y in March, near the cycle high of 2.68% in January and near the top of the 1-3% target range. Consensus sees steady rates through 2021, with odds of a hike rising as we move into 2022. We concur. High copper prices should help the economy rebound quickly this year. Political uncertainty is running high ahead of the April 11 presidential vote. Polls suggest a tight race between Yonhy Lescano, Hernando de Soto, and Veronika Mendoza. If no candidate wins 50% (which seems likely), then a second round with the top two vote-getters will be held in June.
Brazil reports March IPCA inflation Friday. Inflation is expected at 6.19% y/y vs. 5.20% in February. If so, it would be the highest since December 2016 and further above the 2.25-5.25% target range. Next policy meeting is May 5 and the CDI market is pricing in a 75-100 bp move, followed by another 75 bp hike at the June 16 meeting. Investor confidence in the government has been shaken and it will be up to the central bank to help regain it. With inflation rising and the real remaining weak, it’s clear that a lot of front-loaded tightening is likely to be seen. The economy is already reeling from the pandemic and rate hikes will add to the headwinds.
EUROPE/MIDDLE EAST/AFRICA
Turkey reports March CPI Monday. Inflation is expected at 16.20% y/y vs. 15.61% in February. If so, it would be the highest since July 2019 and further above the 3-7% target range. Next policy meeting is April 15. While a rate cut then seems likely, new central bank Governor Kavcioglu warned that tight policy is still needed. Political risk is also picking up. President Erdogan summoned his cabinet and top officials for a meeting this Monday after a group of retired navy admirals criticized the government’s stance on the so-called Montreux Convention. Reports suggest Erdogan is considering withdrawing but the admirals warned that the 1936 treaty is a guarantee of peace in the Black Sea and was seen as a direct challenge from the military to the civilian government.
Russia reports March CPI Tuesday. Headline inflation is expected to rise a tick to 5.8% y/y. If so, it would be the highest since November 2016 and further above the 4% target. Next policy meeting is April 23 and another 25 bp hike to 4.75% is expected after it hiked rates for the first time at the March 19 meeting. Consensus sees 25 bp of tightening in both Q2 and Q3, followed by another 25 bp hike to 5.25% by mid-2022. We see potential for a more aggressive tightening cycle. February trade and Q1 current account data will be reported Friday.
National Bank of Poland meets Wednesday and is expected to keep rates steady at 0.10%. Minutes for the March 3 meeting will be released Friday. At that meeting, the bank kept rate steady but threatened to intervene in the FX market again. It also raised its macro forecasts for this year. Growth is seen between 2.6-5.3% vs. 0.8-4.5% previously, while inflation is seen between 2.7-3.6% vs. 1.8-3.2% previously. With the economy suffering from the pandemic, the bank is likely to maintain accommodative policy well into 2022. With rates at rock bottom and QE continuing, a weaker zloty will likely be the main policy lever if more stimulus is needed.
Hungary central bank releases its minutes Wednesday. February IP and trade will be reported Thursday. February retail sales and March CPI will be reported Friday. Inflation is expected at 3.7% y/y vs. 3.1% in February. If so, it would be the highest since August 2020 and nearing the top of the 2-4% target range. At the March 23 meeting, the bank saw rising inflation as temporary and expects it to peak near 5% in Q2 before falling back into the target range again this summer. Next policy meeting is April 27 and no change is expected then.
ASIA
Thailand reports March CPI Monday. Inflation is expected at 0.21% y/y vs. -1.17% in February. If so, it would be the first positive reading since February 2020 but still well below the 1-4% target range. Next policy meeting is May 5 and rates are expected to remain steady at 0.5%. At its last meeting March 24, the bank left rates steady but noted that policy must remain accommodative while “fiscal measures must continue to sustain the economy,” adding that it is “ready to use additional appropriate monetary policy tools if necessary.”
Singapore reports February retail sales Monday. Headline sales are expected at -0.7% m/m vs. -1.8% in January. Q1 GDP will be reported sometime this week and is expected to grow 1.0% q/q vs. 3.8% in Q4. The MAS meets on the same day as the GDP report. With the regional recovery taking hold, the MAS is likely to maintain its current accommodative stance and keep its S$NEER trading band unchanged.
Philippines reports March CPI Tuesday. Inflation is expected at 4.8% y/y vs. 4.7% in February. If so, it would be the highest since December 2018 and further above the 2-4% target range. Next policy meeting is May 13. While the easing cycle is clearly over, we do not think the bank will be in any rush to tighten. Consensus sees steady rates through 2021, with odds of a hike rising as we move through 2022. We concur. February trade will be reported Thursday.
Caixin reports March services and composite PMI readings Tuesday. Services is expected at 52.1 vs. 51.5 in February. Last week, Caixin reported weaker than expected manufacturing PMI of 50.6 vs. 50.9 in February, while official manufacturing and non-manufacturing PMIs came in stronger than expected at 51.9 and 56.3, respectively. China reports March CPI and PPI Friday. The latter is expected to rise 0.3% y/y vs. -0.2% in February, while the latter is expected to rise 3.5% y/y vs. 1.7% in February. For now, the recovery remains solid as policymakers remain focused on rebalancing and deleveraging the economy.
Reserve Bank of India meets Wednesday and is expected to keep rates steady at 4.0%. Inflation was 5.03% y/y in February, the highest since November and near the top of the 2-6% target range. With a huge slug of fiscal stimulus in place, the RBI is likely to remain on hold until price pressures ease a bit. Consensus sees steady rates through 2021, with odds of a hike rising around mid-2022 and beyond. We are not convinced the easing cycle is over but it will depend on how the economic outlook evolves.
Taiwan reports March CPI Thursday. Inflation is expected at 1.30% y/y vs. 1.37% in February. If so, it would remain near the cycle highs. Even though the central bank does not have an explicit inflation target, low price pressures should allow it to maintain its current accommodative stance through 2021. Next policy meeting is June 17 and no change is expected. Consensus sees steady rates through Q3 2022. We concur. March trade will be reported Friday, with exports expected to rise 20.0% y/y vs. 9.7% in February and imports expected to rise 16.2% y/y vs. 5.7% in February. The external sector is likely to remain a source of strength as global demand for semiconductors remains unmet.
