EM FX was mixed last week despite the dollar’s broad gains against the majors. COP, ZAR, and HUF outperformed while PHP, CLP, and IDR underperformed. China’s stimulus has so far had little impact on the mainland economy and has weighed on EM FX. Sluggish growth across EM is taking precedence for policymakers and so most EM central banks remain in easing mode. Elsewhere, the data continue to show that U.S. economic exceptionalism is continuing and that is likely to get the Fed to signal a pause after the expected cut this week. This backdrop should lead to further weakness in EM FX.
AMERICAS
Brazil central bank publishes its minutes Tuesday. Last week, the bank unexpectedly hiked rates 100 bp to 12.25% and promised more jumbo cuts ahead. Most were looking for a 75 bp move. The bank stated that “In light of a more adverse scenario for inflation convergence, the Committee anticipates further adjustments of the same magnitude in the next two meetings, if the scenario evolves as expected.” The bank warned that “the perception of agents about the recent fiscal announcement has significantly impacted asset prices and expectations, especially the risk premium, inflation expectations and the exchange rate.” The swaps market is now pricing in a terminal policy rate of 16.25% vs. 15.75% before the decision. The bank then publishes its quarterly inflation report Thursday.
Chile central bank meets Tuesday and is expected to cut rates 25 bp to 5.0%. At the last meeting October 17, the bank cut rates 25 bp to 5.25% and said, “The key rate will see further reductions to meet its neutral level” whilst adding that this will occur at a pace that will consider the evolution of the macroeconomic scenario and its implications for inflation’s trajectory.” The swaps market is pricing in a terminal rate of 4.75% over the next 12 months.
Banco de Mexico meets Thursday and is expected to cut rates 25 bp to 10.0%. However, nearly a third of the analysts polled by Bloomberg look for a larger 50 bp move. At the last meeting November 14, Banco de Mexico cut rates 25 bp to 10.25% and signaled more easing to come. Since then, price pressures have eased, with core inflation falling to 3.58% y/y in November, the lowest since March 2019. Looking ahead, the swaps market is pricing in 175 bp of total easing over the next 12 months that would see the policy rate bottom near 8.5%.
Colombia central bank meets Friday and is expected to cut rates 50 bp to 9.25%. At the last meeting October 31, the central bank cut rates 50 bp to 9.75% and Governor Villar noted that “Today’s interest rate cut continues to support economic growth and maintains the necessary prudence given the inflation risks that remain.” Since then, headline inflation has fallen to 5.2% y/y in November, the lowest since October 2021. The swaps market is pricing in 175 bp of total easing over the next 12 months that would see the policy rate bottom near 8.0%. Ahead of the decision, Colombia reports October IP and retail sales Monday. October GDP proxy will be reported Wednesday.
EUROPE/MIDDLE EAST/AFRICA
National Bank of Hungary meets Tuesday and is expected to keep rates steady. At the last meeting November 19, the bank kept rates steady at 6.5%. Only one MPC member recommended a rate cut, suggesting the bar for the bank to resume easing is high. Indeed, Deputy Governor Virag said the bank was prepared to keep rates steady for a “sustained period.” The swaps market is pricing in 50 bp of easing over the next 12 months but if the forint remains weak, we believe the bank will remain on hold.
Czech National Bank meets Thursday and is expected to keep rates steady at 4.0%. At the last meeting November 7, the bank cut rates 25 bp to 4.0% and Governor Michl warned that it would be very cautious with further cuts. Since then, Michl has focused on core inflation and noted “That’s why we are very likely to pause the process of lowering interest rates soon. We will choose stability of interest rates for some time, assess the new forecast with a goal to bring core inflation slightly below 2% and the overall inflation to the target.” Looking ahead, the swaps market is pricing in 50 bp of total easing over the next six months that would see the policy rate bottom near 3.5%.
ASIA
People’s Bank of China sets its 1-year MLF rate sometime this week. It is expected to be kept steady at 2.0%. China reports November IP, retail sales, FAI, property investment, and home prices Monday. IP is expected to pick up a tick to 5.4% y/y, sales are expected to pick up two ticks to 5.0% y/y, and FAI is expected to pick up a tick to 3.5% YTD. Commercial banks will set their Loan Prime Rates Friday and are expected to keep them steady. However, policymakers have made it clear that further monetary easing will be seen in 2025.
Bank of Thailand meets Wednesday and is expected to keep rates steady at 2.25%. At the last meeting October 16, the central bank cut unexpectedly rates 25 bp to 2.25%. The vote was 5-2, with the two dissents in favor of steady rates. The bank noted that “Most members thus voted to cut the policy rate by 0.25 percentage point to alleviate debt-servicing burden for borrowers. Moreover, the lower policy rate would not impede debt deleveraging given the expected slowdown in loan growth and would remain neutral and consistent with economic potential.” The bank also stressed that the cut was a “recalibration” and not the start of an easing cycle. The swaps market disagrees and is pricing in 50 bp of easing over the next 12 months that would see the policy rate bottom near 1.75%.
Bank Indonesia meets Wednesday and is expected to keep rates steady at 6.0%. However, nearly half the analysts polled by Bloomberg see a 25 bp cut to 5.75%. At the last meeting November 20, Bank Indonesia kept rates steady at 6.0%. Governor Warjiyo acknowledged that “The room for rate cuts that we previously saw as wide does seem narrower now.” He added that “If we consider the low domestic inflation and the need to boost economic growth, of course there is still room for rate cuts. But with the rapid development of global dynamics, the focus of our monetary policy remains directed at strengthening rupiah stability against global geopolitical and economic uncertainties.” Since then, the rupiah has continued to weaken and so we look for steady rates.
Philippine central bank meets Thursday and is expected to cut rates 25 bp to 5.75%. At the last meeting October 16, the central bank cut rates 25 bp to 6.0%. Governor Remolona said that another 25 bp cut in December was possible but noted that a 50 bp cut would be “too aggressive.” He added that “We prefer to take baby steps in terms of adjusting the policy rate, meaning 25 bp at a time - but not necessarily every quarter or not necessarily every meeting.” Lastly, Remolona said that while another 100 bp of easing is possible, it would be on the “dovish side.” The swaps market disagrees and is pricing in 200 bp of total easing still to come.
Taiwan central bank meets Thursday and is expected to keep rates steady at 2.0%. At the last meeting September 19, the bank kept rates steady as expected at 2.0% but tightened liquidity by raising commercial bank reserve ratios 25 bp for the second straight meeting. The bank also tightened home-buying rules for the second straight meeting, including expanding limits on borrowing to buy second homes to more regions. While the bank does not have an explicit inflation target, inflation is sticky around 2% and property market concerns should keep rates on hold for now. Next meeting is December 19 and no change is expected then. However, the swaps market is nearly pricing in a 12.5 bp hike over the next 12 months. November exports orders will be reported Friday and are expected at 6.8% y/y vs. 4.9% in October.
Malaysia reports November CPI data Friday. Headline is expected to pick up two ticks to 2.1% y/y. If so, it would be the highest since June 2023. At the last meeting November 6, the bank kept rates steady at 3.0%. Next meeting is January 22 and another hold seems likely. While Bank Negara does not have an explicit inflation target, low price pressures should allow it to cut rates in 2025 if growth slows too much. The swaps market is pricing in 25 bp of easing over the next 12 months. Ahead of that, November trade data will be reported Wednesday. Exports are expected at 0.5% y/y vs. 1.6% in October while imports are expected at 3.7% y/y vs. 2.6% in October.
