Rising US yields remain the biggest risk to EM FX. As yields fell last week after US CPI data, the dollar softened and EM FX got some traction. Yields then recovered to end the week at new highs, giving the dollar a boost and putting downward pressure on EM FX. What’s next? US retail sales Tuesday and, more importantly, the FOMC decision Wednesday will set the tone for the US rates outlook as we move towards Q2. We will be sending out an FOMC preview Monday and expect the Fed to push back a little more against a steeper US yield curve, which would be positive for EM FX.
Colombia reports January manufacturing production and retail sales Monday. Production is expected to fall -1.9% y/y vs. +1.5% in December, while sales are expected to fall -6.7% y/y vs. -2.8% in December. The economy remains disappointingly weak despite high oil prices. 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.
Brazil COPOM meets Wednesday and is expected to hike rates 50 bp to 2.5%. Some analysts look for a smaller 25 bp hike, while the CDI market is pricing in 75 bp. IPCA inflation came in at 5.20% y/y in February, higher than expected and the highest since January 2017. It is also approaching the top of the 2.25-5.25% target range and may require a stronger response from the central bank. We suspect the exchange rate may be the deciding factor between a 50 or 75 bp move.
Poland reports February CPI Monday. Headline is expected at 2.6% y/y vs. 2.7% in January. February core CPI and January trade and current account data will be reported Tuesday. PPI and industrial output will be reported Thursday. Real retail sales and construction output will be reported Friday. Last week, the central bank the latest to become concerned about rising yields and said it may modify its open market operations. No other details were given but perhaps they will be unveiled at the next policy meeting April 7. The Polish curve has steepened 35-40 bp over the past month and the pushback supports our view that rate hikes are off the table for the foreseeable future.
Israel reports February CPI Monday. Headline is expected at -0.1% y/y vs. -0.4% in January. If so, it would be the “highest” since March 2020 but still well below the 1-3% target range. At the last meeting February 22, the central bank left rates steady at 0.10% but said it was more optimistic about 2021 growth even though the risks remain high. It also noted that shekel weakness since mid-January was supportive for exports and inflation. FX intervention to weaken the currency remains the primary policy lever, as evidenced by its burgeoning foreign reserves. Next policy meeting is April 19.
Russia reports February IP Tuesday. It is expected to fall -2.1% y/y vs. -2.5% in January. PPI will be reported Wednesday and is expected to rise 8.9% y/y vs. 6.7% in January. The central bank meets Friday and is expected to keep rates steady at 4.25%. Real retail sales will be reported after the decision and are expected to fall -1.3% y/y vs. -0.1% in January. CPI rose 5.7% y/y in February, the highest since November 2016 and further above the 4% target. PPI trends suggest pipeline price pressures are still rising and so markets should be prepared for a tightening cycle to begin sometime this year.
South Africa reports January retail sales Wednesday. Sales are expected to fall -2.2% y/y vs. -1.3% in December. The economy remains weak while unemployment stands at a record 32.5%. Meanwhile, CPI rose3.2% y/y in January and remains near the bottom of the 3-6% target range. As such, we simply cannot believe the central bank’s model showing two rate hikes this year. Next SARB policy meeting is March 25. While it may be too soon to get a dovish surprise, perhaps the bank can start preparing markets for a possible cut.
Turkey central bank meets Thursday and is expected to hike rates 100 bp to 18.0%. Unlike previous decisions with a wide disparity of views, analysts are universally looking for 100 bp (though one sees steady rates). CPI rose 15.61% y/y in February, higher than expected and the highest since July 2019. With real rates falling since the last hike in December, the bank should deliver a larger than expected hike to reinforce market confidence and so we see slight chances for a hawkish surprise.
China reports January and February IP and retail sales Monday. January and February were combined to avoid y/y distortions from the timing of the Lunar New Year. However, IP is still expected to surge 32.2% y/y and sales are expected to jump 32.0% y/y. Low base effects from the pandemic are still quite flattering but there’s no denying that the recovery remains strong. The 2021 growth target of “above 6%” will easily be met but gives policymakers leeway to pare back on its credit-driven recovery. PBOC sets its 1-year MLF rate sometime this week and is likely to keep it steady at 2.95%.
Indonesia reports February trade data Monday. Exports are expected to rise 7.87% y/y vs. 12.24% in January, while imports are expected to rise 12.05% y/y vs. -6.49% in January. Bank Indonesia meets Thursday and is expected to keep rates steady at 3.5%. CPI rose 1.38% y/y in February, near the cycle low of 1.32% from August and well below the 2.5-4.5% target range. With the still struggling, we think another rate cut is possible this year but much will depend in the external backdrop and the rupiah.
Singapore reports February trade Wednesday. NODX are expected to rise 6.3% y/y vs. 12.8% in January. The recovery continues and so we expect the MAS to keep policy steady at its semiannual meeting in April. If further stimulus is needed, we expect it will come from the fiscal side. CPI rose 0.2% y/y in January, the highest since February 2020. While the MAS does not have an explicit inflation target, low price pressures should allow it to keep policy at its current accommodative settings through 2021.
Taiwan central bank meets Thursday and is expected to keep rates steady at 1.125%. CPI rose 1.37% y/y in February, the highest since January 2020 but distorted somewhat by the timing of the Lunar New Year holiday. While the central bank does not have an explicit inflation target, relatively low price pressures should allow it to keep policy steady through 2021. The strong TWD is helping to dampen inflation but the central bank continues to intervene to slow the appreciation. Taiwan’s exports remain robust, which Governor Yang said was due to strong demand for semiconductors rather than any perceived unfair advantage from its currency intervention.