EM Preview for the week of March 21, 2021

Here's a look at the main drivers in Emerging Markets this week.

EM FX had a mixed week as the dollar reasserted its strength.  TRY and BRL benefitted from hawkish surprises from their central banks, whilst RUB did not.  However, the weekend firing of Turkish central bank chief Agbal means the lira will come under severe pressure this week.  As global rates continue to climb, EM will have to deal with two opposing drivers.  Stronger global growth is clearly a positive, but rising interest rates in the developed world will hurt the liquidity story.  We think the former will outweigh the latter, but EM investors will have to prepared to deal with rising volatility and continued divergences within the asset class.



Brazil central bank minutes will be released Tuesday.  Mid-March IPCA inflation will be reported Thursday and is expected to accelerate to 5.53% y/y vs. 4.57% in mid-February.  If so, inflation would be the highest since December 2016 and above the 2.25-5.25% target range.  COPOM just delivered a hawkish surprise last week with a 75 bp hike to 2.75% and signaled a similar hike at the next meeting May 5.  The central bank has been intervening regularly to support the real and that supports our view that the weak currency probably tipped the bank into a more hawkish stance.  February current account and FDI data will be reported Friday. 

Mexico reports mid-March CPI Wednesday.  Headline inflation is expected at 3.88% y/y vs. 3.84% in mid-February.  If so, inflation would remain near the top of the 2-4% target range.  Banco de Mexico meets Thursday and is expected to keep rates steady at 4.0%.  However, the market is split as nearly a third of the analysts polled by Bloomberg see a 25 bp cut to 3.75%.  The bank just cur rates in February for the first time since September, delivering a unanimous 25 bp cut.  While further cuts are likely, we think recent peso weakness is likely to keep the bank cautious for now.  February trade will be reported Friday.

Colombia central bank meets Friday and is expected to keep rates steady at 1.75%.  CPI rose 1.56% y/y in February, near the cycle low of 1.49% from November and well below the 2-4% target range.  Markets see steady rates for much of 2021, with tightening priced in for Q4 and beyond.  We are not convinced and see some room for further easing.  Next policy meeting is March 26.  S&P stressed that a strong economic rebound in 2021 is key for Colombia to maintain its investment grade BBB- rating, as it will make fiscal consolidation easier.  The agency forecasts 6% growth this year.


The shock firing of central bank chief Agbal over the weekend may deal a fatal blow to investor confidence in Turkey.  It’s clear that by delivering an orthodox hawkish surprise 200 bp hike last week, Agbal’s days were numbered as  he found himself at the receiving end of President Erdogan’s ire.  After regaining investor confidence with a series of aggressive rate hikes, Turkey has snatched defeat from the jaws of victory.  At this point, it doesn’t matter who Agbal’s replacement is or what they say, as it’s clear that Erdogan is running the show.  USD/TRY is likely to test the all-time high near 8.58 from November, and could even surpass it. 

National Bank of Hungary meets Tuesday and is expected to keep the base rate steady at 0.60%.  CPI rose 3.1% y/y in February, the highest since September but still and near the center of the 2-4% target range.  Despite the weak forint, the central bank has not snugged the one-week deposit rate since its 15 bp move back in late September.  That move came during a bout of forint weakness and so that rate seems to be the preferred tool for supporting the currency while the base rate remains the main policy lever.  If EUF/HUF continues to weaken, we suspect the bank may snug the deposit rate again.  

Czech National Bank meets Wednesday and is expected to keep rates steady at 0.25%.  CPI rose 2.1% y/y in February, the lowest since December 2018 and nearing the center of the 1-3% target range.  While some look for the tightening cycle to begin later this year, central banker Michl warned that expectations for a summer lift-off were “premature.”  Of note, the central bank’s models suggest that each percentage point move in the currency is equivalent to a 25 bp move in the policy rate.  EUR/CZK rose 3% from -January to mid-February, but has since given back half of that rise.  As such, the perceived need to hike rates has likely fallen too.

South Africa reports February CPI Wednesday.  Headline inflation is expected to fall a tick to 3.1% y/y.  If so, inflation would remain near the bottom of the 3-6% target range.  SARB meets Thursday and is expected to keep rates steady at 3.5%.  At the last meeting in January, the central bank said its model showed two rate hikes this year, in Q2 and Q2.  With unemployment running above 30% and the economy still suffering from the pandemic, we simply can’t believe that this will come to pass.  


Korea reports trade data for the first 20 days of March Monday.  In the first 10 days of the month, average daily exports rose 25.2% y/y and imports rose 31.4% y/y.  Export strength was driven largely by chips and autos.  Tensions on the Korean peninsula may rise after North Korea criticized the Biden administration and ruled out talks with the US for now.  Comments came as US Secretary of State Blinken and Secretary of Defense Austin were visiting South Korea last week.      

Taiwan reports February export orders Monday.  Orders are expected to surge 49.4% y/y vs. 49.3% in January, with both months reflecting strong demand for semiconductors.  IP will be reported Tuesday and is expected to rise 9.8% y/y vs. 18.8% in January.  For now, the strong currency is having no impact in exports but central bank Governor Yang acknowledged last week that the bank remains active.  Indeed, he reportedly used “intervention” for the first time instead of the usual euphemism of “smoothing.”  

Singapore reports February CPI Tuesday.  Headline inflation is expected to accelerate to 0.6% y/y from 0.2% in January.  If so, it would be the highest since January 2020.  While the MAS does not have an explicit inflation target, relatively low price pressures should allow it to maintain its current accommodative policy at the next meeting in April.  IP will be reported Friday and is expected to rise 14.6% y/y vs. 8.6% in January.

Bank of Thailand meets Wednesday and is expected to keep rates steady at 0.5%.  CPI fell -1.2% y/y in February, the lowest since June and well below the 1-3% target range.  The economy continues to suffer from the pandemic as the national state of emergency was extended through the end of May.  Fiscal policy is likely to carry the load for further stimulus this year if needed.  

Philippine central bank meets Thursday and is expected to keep rates steady at 2.0%.  CPI rose 4.7% y/y in February, the highest since December 2018 and above the 2-4% target range.  The rise in inflation has been largely driven by food and energy and so the bank is unlikely to respond with any tightening.  That said, the easing cycle is likely over now and so the bank is on hold for the time being.  

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