EM FX was mostly weaker last week despite the dollar’s mixed performance against the majors. COP, MXN, and BRL outperformed while CLP, THB, and CZK underperformed. We expect U.S. data this week to underscore our belief that the Fed is nowhere near cutting rates. This should benefit the dollar. On the other hand, EM central banks continue to cut rates and so the narrowing interest rate differentials will weigh on EM FX.
AMERICAS
Colombia reports key real sector data this week. December IP and retail sales Wednesday. IP is expected to fall a tick to -3.1% y/y, while sales are expected to improve to -2.3% y/y vs. -3.4% in November. Q4 GDP will be reported Thursday and is expected at -0.6% q/q vs. 0.2% in Q3. The y/y rate is expected at 0.8% vs. -0.3% in Q3. Despite the weak economy, inflation has remained stubbornly high and so the central bank delivered a hawkish surprise January 31 with a 25 bp cut to 12.75% vs. 50 bp expected. Governor Villar said the slowdown last year was part of a “needed adjustment” and that uncertainty calls for cautious rate cuts. The swaps market is pricing in 450 bp of easing over the next 12 months followed by another 125 bp over the subsequent 12 months that would see the policy rate bottom at 7.0%.
Chile central bank minutes will be released Thursday. At the January 31 meeting, the bank cut rates 100 bp to 7.25%, as expected. The vote was 4-1, with the dissent in favor of a larger 125 bp move. Since then, CLP has been the worst performer in EM by far. After the first 100 bp cut in July led to peso weakness, the bank dialed it back to 75 bp in September, 50 bp in October, and 75 bp in December. If peso weakness continues, the bank may have to dial it back again at the next meeting April 2. The swaps market is pricing in 300 bp of easing over the next 12 months that would see the policy rate bottom at 4.25%.
EUROPE/MIDDLE EAST/AFRICA
Hungary central bank minutes and Q4 GDP will be reported Wednesday. The minutes will offer more details behind the surprise decision January 30 to cut the base rate by 75 bp to 10% vs. 100 bp expected. Since the decision, CPI inflation slowed to a three-year low of 3.8% y/y in January and back within the 2-4% target range. Elsewhere, GDP growth is expected to be subdued at 0.3% q/q vs. 0.9% in Q3, with the y/y rate expected at 0.6% vs. -0.4% in Q3. The soft data should keep the easing cycle going for now. The swaps market is pricing in 450 bp of easing over the next 12 months that would see the policy rate bottom at 5.5%.
Poland reports Q4 GDP Wednesday and January CPI Thursday. Statistics Poland’s preliminary estimate for 2023 growth was 0.2%, implying that GDP rose 1.1% y/y in Q4 vs. 0.5% in Q3. However, the q/q rate is expected at -0.8% vs. 1.5% in Q3. Meanwhile, CPI is expected at 4.2% y/y vs. 6.2% in December. This is the lowest since March 2021 but still above the 1.5-3.5% target range. The data will likely reinforce the central bank’s hawkish hold and offer PLN support. After leaving rates steady at 5.75% last week, Governor Glapinski said “I don’t see prospects for a MPC majority to cut rates if data matches our forecasts this year. In fact, I don’t see a majority for rate moves in either direction.” The swaps market sees steady rates over the next three months followed by 25 bp of easing over the subsequent three months.
Czech Republic reports January CPI Thursday. Headline is expected at 2.9% y/y vs. 6.9% in December. If so, it would be the lowest since June 2021 and back within the 1-3% target range. The Czech National Bank just delivered a dovish surprise last week when cut rates 50 bp to 6.25% vs. 25 bp expected. The vote was 6-1, with the dissent in favor of an even larger 75 bp cut. The dovish surprise should weigh on the currency, as markets ramp up easing expectations. The swaps market is pricing another 300 bp of easing over the next 12 months followed by another 50 bp over the subsequent 12 months that would see the policy rate bottom at 2.75%. This is well below market expectations for Poland and Hungary.
Israel reports January CPI Thursday. Headline is expected at 2.7% y/y vs. 3.0% in December. If so, it would be the lowest since November 2021 and back within the 1-3% target range. The central bank started the easing cycle with a 25 bp cut to 4.5% January 1 but Governor Yaron warned that “A risky fiscal policy can affect rate decisions moving forward. If the markets perceive that Israel is moving toward a prolonged path of rising debt, it’s likely to lead to increased yields, depreciation and inflation, such that a higher central bank interest rate will be required.” Next policy meeting is February 26 and another 25 bp cut to 4.25% seems likely. The swaps market is pricing in 125 bp of easing over the next 12 months that would see the policy rate bottom at 3.25%.
ASIA
The PBOC sets its key MLF rate this coming weekend. The rate is expected to be kept steady at 2.5% while the bank is expected to add CNY500 bln of liquidity through that mechanism vs. CNY995 bln last month. Deflation deepened in January and weak aggregate demand suggests little relief in sight. While further monetary easing is likely in the coming months, it is unlikely to have much impact until the huge debt overhang is addressed.
India reports January CPI and December IP Monday. Headline is expected at 4.99% y/y vs. 5.69% in December, while IP is expected to pick up a tick to 2.5% y/y. If so, headline would be the lowest since October and reverse two straight months of acceleration. WPI will be reported Wednesday and is expected at 0.52% y/y vs. 0.73% in December. The Reserve Bank of India just delivered a hawkish hold. The vote was 5-1 and the bank maintained its policy stance at “withdrawal of accommodation.” Governor Das stressed that “The job is not yet finished and we have to be vigilant of new supply shocks.” Nonetheless, the swaps market is pricing in the start of an easing cycle with a 25 bp cut over the next three months. A total of 75 bp of easing is seen over the next 12 months that would see the policy rate bottom at 5.75%.
Philippine central bank meets Thursday and is expected to keep rates steady at 6.5%. At the last meeting December 14, the bank delivered a hawkish hold. Governor Remolona said, “The Monetary Board continues to see the need to keep monetary policy settings sufficiently tight to allow inflation expectations to settle more firmly within the target range.” The bank lowered its 2024 inflation forecast slightly to 4.2% vs. 4.4% previously and said it will monitor the effect of its previous 450 bp of tightening on the economy. Despite the hawkish tone, the swaps market is pricing in 25 bp of easing over the next three months, with a total 200 bp of easing seen over the subsequent nine months that would take the policy rate down to 4.5%.
