EM FX was mixed last week despite the broad dollar rally against the majors. CLP, TRY, and ZAR outperformed while CZK, PLN, and PHP underperformed. We believe Fed Chair Powell delivered as hawkish a message as he could whilst still remaining data dependent. Jobs data this Friday takes on even greater importance. When all is said and done, we believe the underlying U.S. economic resilience will require further tightening by the Fed and that will keep downward pressure on EM FX. Weak data out of China this week should also be negative for EM.
AMERICAS
Mexico reports July trade data Monday. June GDP proxy will be reported Tuesday and is expected at 4.4% y/y vs. 4.3% in May. Banco de Mexico releases its quarterly inflation report Wednesday. Minutes from the last policy meeting August 10 show the bank is in no hurry to cut rates. Several policymakers said it was too soon to consider easing, with one noting that it could hold rates and one even warned of the potential need for further tightening. It was noted that the peso’s appreciation was helping ease price pressures, but the balance of inflation risks remain biased to the upside. Next policy meetings are September 28 and November 9 and no change is expected at either one as the swaps market sees steady rates over the next three months. However, 25 bp of easing is seen over the subsequent three months and so a cut at the December 14 meeting is possible.
Brazil release July central government budget data Wednesday. A primary deficit of -BRL31.2 bln is expected vs. -BRL45.2 bln in June. Consolidated budget data will be reported Thursday and a primary deficit of -BRL34.7 bln is expected vs. -BRL48.9 bln in June. The fiscal trajectory should improve as interest rates fall and growth picks up. Next COPOM meeting is September 20 and another 50 bp cut to 12.75% is expected. Q2 GDP and August trade data will be reported Friday. Growth is expected at 0.3% q/q and 2.7% y/y vs. 1.9% and 4.0% in Q1, respectively. The swaps market is pricing in 125 bp of total easing over the next three months followed by another 100 bp over the subsequent three months. Such aggressive easing would likely take a toll on the currency.
Chile reports July IP and retail sales Thursday. IP is expected at -1.0% y/y vs. -2.7% in June, while sales are expected at -9.5% y/y vs. -13.0% in June. July GDP proxy will be reported Friday and is expected at 0.9% y/y vs. -1.0% in June. No wonder the central bank is in a hurry to ease. Next policy meeting is September 5 and another 100 bp cut to 9.25% seems likely. The swaps market is pricing in 200 bp of total tightening over the next three months, followed by another 100 bp over the subsequent three months. Such aggressive easing would likely take a toll on the currency.
EUROPE/MIDDLE EAST/AFRICA
Turkey reports July trade data Tuesday. A deficit of -$12.4 bln is expected vs. -$5.16 ln in June. If so, the 12-month total would rise to -$120.9 bln and just below the recent high of -$122.3 bln. Q2 GDP data will be reported Thursday. Growth is expected at 2.5% q/q and 3.1% y/y vs. 0.3% and 4.0% in Q1, respectively. If so, the y/y rate would be the lowest since Q3 2019 and likely to slow further if the central bank continues tightening aggressively after its hawkish surprise last week took the policy rate up to 25.0%. The swaps market is pricing in a peak rate near 33.75% over the next six months, up from 27.5% at the start of last week. This still would not be enough to tame inflation and stabilize the lira.
National Bank of Hungary meets Tuesday. It is expected to keep the base rate steady at 13.0% but continue to cut the 1-day deposit rate by 100 bp each month to 14.0%. Another cut next month will align the two rates at 13.0%, after which the central bank is expected to continue cutting both equally in the coming months. The swaps market sees 175 bp of easing over the next three months followed by another 225 bp over the subsequent months that would take both rates down to 9.0%. Such aggressive easing would likely take a toll on the currency. July PPI will be reported Thursday.
South Africa reports July money, private sector credit, and budget data Wednesday. July PPI and trade data will be reported Thursday. PPI is expected at 3.0% y/y vs. 4.8% in June as price pressures continue to ease. Last week, July headline inflation came in at 4.7% y/y, the lowest since July 2021. While SARB Governor Kganyago characterized its job lowering inflation as “not yet done,” we believe the tightening cycle is over. Next policy meeting is September 21 and no change is expected. The swaps market is now pricing in 25 bp of easing over the next six months vs. steady rates seen at the start of last week.
National Bank of Poland releases its minutes Wednesday. At that July 6 meeting, the bank kept rates steady at 6.75% but highlight a potential cut next month as Governor Glapinski said “If inflation will be in the single digits and if the projection for the nearest quarters and years shows, with a 90% certainty, that price growth will slow further, then it’s possible in September.” August CPI will be reported Thursday, with headline expected at 10.0% y/y vs. 10.8% in July. Next policy meeting is September 13 and a 25 bp cut then to 6.5% seems likely. The swaps market is pricing in 50 bp of easing over the next three months followed by another 75 bp over the subsequent three months. Such aggressive easing would likely take a toll on the currency.
ASIA
Korea reports July IP Thursday. It is expected at -5.0% y/y vs. -5.6% in June. August trade data will be reported Friday. Exports are expected at -12.2% y/y vs. -16.4% in July, while imports are expected at -22.9% y/y vs. -25.4% in July. We can’t get excited about a modest improvement in trade data, not when China is still slowing. Korea is also losing competitiveness to Japan as the key JPY/KRW cross continues to trade around 9, the lowest since mid-2015.
China reports official August PMIs Thursday. Manufacturing is expected at 49.1 vs. 49.3 in July and non-manufacturing is expected at 51.0 vs. 51.5 in July. If so, the composite should fall over half a point from 51.1 in July. Caixin reports its manufacturing PMI Friday and is expected to remain steady at 49.2. Its services and composite PMIs won’t be reported until next Tuesday, with services expected at 53.3 vs. 54.1 in July. If so, the Caixin composite should fall nearly a point from 51.9 in July. Data out of China is likely to continue weakening as policymakers refrain from injecting significant stimulus, at least for now.
Indonesia reports August CPI Friday. Headline is expected at 3.34% y/y vs. 3.08% in July, while core is expected at 2.20% y/y vs. 2.43% in July. If so, it would be the first acceleration in headline since February but still within the 2-4% target range. Bank Indonesia just kept rates steady at 5.75% last week and Governor Warjiyo said that the policy focus remains on maintaining rupiah stability. He added that Bank Indonesia won’t hike rates further if the Fed hikes but will continue to allow short-term bond yields to rise to support the rupiah. Bloomberg consensus sees the start of an easing cycle with 25 bp in Q1 followed by 25 bp in Q2 and Q3. Even this may be too aggressive; with the Fed expected to maintain tight policy, we believe that Bank Indonesia has very little cushion to cut rates without weighing on the rupiah.
