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.

 

AMERICAS

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.

EUROPE/MIDDLE EAST/AFRICA

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.  

ASIA

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.  
 

More from Mind on the Markets

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2021. All rights reserved..

This browser is not fully supported by our public website and may not display or function as expected for this reason. Please note, the Infuse Portal and BBH client applications fully support the IE 11 browser.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com


captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction