EM FX was mixed last week despite broad dollar losses against the majors. ZAR, THB, and COP outperformed while ARS, PHP, and BRL underperformed. The dovish hold by the Fed helped fuel the “buy everything” rally but officials then pushed back against rate cut expectations. The Fed outlook is likely to remain in flux as U.S. data continue to come in firm, which supports our view that the easing cycle is likely to come later than what the market expects. Until markets reprice this, EM FX has room to rally.
AMERICAS
Brazil central bank releases its minutes Tuesday. At last week’s meeting, the bank cut rates 50 bp to 11.75%, as expected. It said, “If the scenario evolves as expected, the Committee members unanimously anticipate further reductions of the same magnitude in the next meetings.” Next meetings are January 31, March 20, May 8, and June 19. October GDP proxy will be reported Wednesday and is expected at 1.70% y/y vs. 0.32% in September. The bank then releases its quarterly inflation report Thursday. November current account and FDI data will be reported Friday.
Colombia reports October GDP proxy Monday. It is expected at 0.3% y/y vs. -0.1% in September. The central bank meets Tuesday and is expected to cut rates 25 bp to 13.0%. However, the market is split. Of the 15 analysts polled by Bloomberg, 6 see steady rates and 9 see a 25 bp cut. At the last meeting October 31, the bank kept rates steady at 13.25%, as expected. Minutes will be released Friday. The swaps market is pricing in 75 bp of total easing over the next three months followed by another 75 bp of easing over the subsequent three months.
Chile central bank meets Tuesday and is expected to cut rates 75 bp to 8.25%. However, the market is split. Of the 13 analysts polled by Bloomberg, 4 see a 50 bp cut and 9 see a 75 bp cut. At the last meeting October 26, the bank delivered a hawkish surprise and cut rates 50 bp to 9.0% vs. 75 bp expected. It had warned that the strong dollar was a factor in its decision making. Since that meeting, the peso has gained nearly 6% vs. the dollar while inflation has come down further. As such, the bank is likely to go back to larger rate cuts. The swaps market is pricing in 175 bp of total easing over the next three months followed by another 100 bp of easing over the subsequent three months.
Mexico reports mid-December CPI Thursday. Headline is expected at 4.36% y/y vs. 4.33% previously, while core is expected at 5.22% y/y vs. 5.30% previously. At last week’s meeting, Banco de Mexico kept rates steady at 11.25% and maintained the language that it would hold rates “for some time.” This suggests low odds of a cut February 8 but if inflation continues to fall, a cut March 21 is possible. Swaps market is pricing in 25 bp of easing over the next three months followed by another 25 bp over the subsequent three months. November trade and October GDP proxy will be reported Friday and is expected at 3.93% y/y vs. 3.34% in September.
EUROPE/MIDDLE EAST/AFRICA
Poland reports November core CPI Monday. Core is expected at 7.3% y/y vs. 8.0% in October. At the last meeting December 6, the bank kept rates steady at 5.75%, as expected. IP and PPI will be reported Wednesday. IP is expected at 0.5% y/y vs. 1.6% in October, while PPI is expected at -3.8% y/y vs. -4.1% in October. Real retail sales and construction output will be reported Thursday. Sales are expected at 1.4% y/y vs. 2.8% in October, while construction is expected at 7.0% y/y vs. 9.8% in October.
National Bank of Hungary meets Tuesday and is expected to cut rates 75 bp to 10.75%. At the last meeting November 21, the bank cut rates 75 bp to 11.5%, as expected, and warned that "Risks surrounding global disinflation and volatility in international investor sentiment warrant a careful approach to monetary policy." This suggests the bank will maintain this pace of easing for the time being. The swaps market is pricing in 125 bp of total easing over the next three months followed by another 200 bp over the subsequent three months.
Turkey central bank meets Thursday and is expected to hike rates 250 bp to 42.50%. At the last meeting November 23, the bank delivered a hawkish surprise and hiked rates 500 bp to 40.0% vs. 250 bp expected. However, it said that “The current level of monetary tightness is significantly close to the level required to establish the disinflation course. Accordingly, the pace of monetary tightening will slow down and the tightening cycle will be completed in a short period of time.” The swaps market is pricing in no more hikes after this one, with an easing cycle expected to start over the next six months.
Czech National Bank meets Thursday and is expected to cut rates 25 bp to 6.75%. Of the 23 analysts polled by Bloomberg, 6 look for steady rates and 17 look for a 25 bp cut. At the last meeting November 2, the bank delivered a hawkish surprise and kept rates steady at 7.0% vs. an expected 25 bp cut. Vice Governor Zamrazilova said policymakers are having a “serious debate” about the timing of a rate cut, adding that risks from cutting too soon are bigger than those of a delay in cutting. The swaps market is pricing in 100 bp of total easing over the next three months followed by another 100 bp over the subsequent three months.
ASIA
We get key regional trade data this week. Singapore reports November trade data Monday. NODX is expected at 1.5% y/y vs. -3.4% in October. Taiwan reports November export orders Wednesday. Korea reports trade data for the first twenty days of December Thursday. Regional activity has recovered but much of it is due to low base effects.
Malaysia reports November trade data Tuesday. Exports are expected at -4.0% y/y vs. -4.4% in October, while imports are expected at -0.3% y/y vs. -0.2% in October. CPI will be reported Friday and is expected to fall a tick to 1.7% y/y. If so, it would be the lowest since Marc 2021. While Bank Negara does not have an explicit inflation target, low price pressures should allow it to maintain steady policy for the time being. Next policy meeting is January 24 and rates are likely to be kept steady at 3.0%. The swaps market is pricing in steady rates over the next three months followed by 25 bp over the subsequent three months.
China banks set their Loan Prime Rates Wednesday. The 1- and 5-year LPRs are expected to remain steady at 3.45% and 4.20%, respectively. However, with deflation risks rising, we expect further monetary easing in the coming weeks as real interest rates are rising.
Bank Indonesia meets Thursday and is expected to keep rates steady at 6.0%. At the last meeting November 23, it kept rates steady, and Governor Warjiyo said, “If you look at the current situation, domestic inflation is low, but in the future there are risks, especially imported inflation from global energy and food prices and rupiah depreciation.” The rupiah bottomed right after the bank delivered a hawkish surprise October 23 and hiked rates 25 bp to 6.0% and has gained over 3% vs. the dollar since then. Bloomberg consensus sees steady rates through H1 followed by 25 bp cuts in both Q3 and Q4.
