EM FX was broadly weaker last week as the dollar reasserted its strength against every major currency. The greenback remains supported by high US yields and a strong economic outlook and that theme should continue as we move into Q2 and another strong US jobs report is expected this week. Stronger global growth and trade should remain supportive for EM FX but for now, it’s hard to decouple from broad-based dollar strength and rising US yields. In this situation, the typical high beta group (TRY, BRL, COP, ZAR) is likely to continue underperforming.
Chile central bank meets Tuesday and is expected to keep rates steady at 0.50%. February retail sales and manufacturing production will be reported Wednesday, which are expected at 6.0% y/y and -2.0% y/y, respectively. Chile’s accelerated vaccination program should allow it to lead the region in terms of growth this year. However, foreign investors may be wary of some policy proposals in congress right now. The lower house floor last week backed legislation that would create a new royalty payment on copper and lithium sales, while a committee will discuss proposals this week for another round of early pension fund withdrawals and a wealth tax.
Brazil reports February consolidated budget data Wednesday. A primary deficit of -BRL21.8 bln is expected. The commitment to fiscal restraint remains an open question after congress approved the 2021 budget with some creative accounting that will skirt the spending cap limit. This has markets gearing up for more aggressive monetary tightening, with a 100 bp hike priced in for the next meeting May 5 and another 75 bp hike for the meeting after that June 16. Central bank President Campos Neto tried to manage market expectations by stressing that the bank has no plans to move to a neutral rate of interest. February IP and March trade data will be reported Thursday. IP is expected to rise 1.5% y/y vs. 2.0% in January.
South Africa reports February money and credit growth and budget data Tuesday. The central bank kept rates steady at 3.5% last week and said its model still shows rate two hikes this year. The hikes are projected in Q2 and Q4 vs. Q2 and Q3 previously. February CPI came in at 2.9% y/y, lower than expected and below the 3-6% target range. Even though the vote to hold rates shifted to 5-0 from 3-2 at the previous meeting, we still find it hard to believe that the bank will hike at all this year. Next policy meeting is May 20 and so the bank’s model will be tested then. Trade data will be reported Wednesday.
Turkey reports February trade Wednesday. A deficit of -$3.4 bln is expected. If so, the 12-month total would rise for the first time since November to -$48.9 bln. If the external deficits continue to worsen, it will take high interest rates to attract foreign capital and that seems unlikely as Erdogan pushes for lower rates. New central bank Governor Kavcioglu promised to stick with the single policy rate that was adopted by his predecessor Agbal. He also pledged continuity in policy but we think most are bracing for rapid rate cuts in the coming months. Next policy meeting is April 15 and the easing cycle could begin as soon as then.
Poland report March CPI Wednesday. Headline inflation is expected to pick up to 2.8% y/y vs. 2.4% in February. If so it would be the highest since November and back in the top half of the 1.5-3.5% target range. Yet the worsening pandemic appears to have pushed the central bank into a more dovish stance. Governor Glapinski wrote that “Our task is to increase the chances of a return to rapid economic growth after the pandemic, while maintaining price stability and macroeconomic balance. This means that we must continue our current monetary policy measures. We must ensure low financing costs for all sectors. We can’t allow any sudden changes in the exchange rate or bond yields to limit our growth prospects.”
Russia reports Q4 GDP Thursday. The economy is expected to have contracted -2.2% y/y vs. -3.4% in Q3. Oil prices remain high but it remains to be seen how much tightening is in the pipeline after the central bank’s first rate hike of the cycle earlier this month. The bank signaled that more hikes are likely but Economy Minister Reshetnikov said inflation has peaked and may end the year near the 4% target. The economic outlook is particularly important coming ahead of legislative elections this fall, where Putin’s United Russia is faring poorly in the polls. The presidential election is scheduled for 2024.
Korea reports February IP Wednesday. It is expected to rise 0.6% y/y vs. 7.5% in January. March trade data will be reported Thursday, with exports expected to rise 16.6% y/y and imports expected to rise 19.0% y/y. March CPI will be reported Friday, with headline inflation expected to pick up to 1.5% y/y from 1.1% in February. If so, it would be the highest since January 2020 but still below the 2% target. Bank of Korea Governor Lee said he expects higher inflation and faster economic growth this year, but downplayed the need to tighten policy. He said improving exports and investment, along with another round of fiscal stimulus, will likely boost growth above the bank’s 3% forecast, adding that inflation will also probably come in above the bank’s 1.3% forecast.
China reports official March PMI readings Wednesday. Manufacturing is expected at 51.2 vs. 50.6 in February, while non-manufacturing is expected at 52.0 vs. 51.4 in February. Caixin reports March manufacturing PMI Thursday and is expected at 51.3 vs. 50.9 in February. Despite signs of a durable economic recovery, mainland stocks remain under pressure. Indeed, all the major mainland indices are down year to date. Faltering foreign investment flows have led to some HKD and CNY softness but the two currencies remain amongst the best performers in EM year to date.
Indonesia reports March CPI Thursday. Headline inflation is expected at 1.40% y/y vs. 1.38% in February. If so, it would remain near the cycle low of 1.32% from last August and below the 2-4% target range. Next policy meeting is April 20 and we see risks of a dovish surprise then. Much will depend on how the rupiah is trading then. Elsewhere, Finance Minister Indrawati stressed that proposals to increase the bank’s role in supporting economic recovery will also ensure its autonomy. Parliament will consider a draft omnibus law this year that will overhaul many financial regulations, including the central bank’s charter. While Indrawati didn’t provide any details of the bill, she emphasized that the government views Bank Indonesia’s independence as key to credible policy.