EM FX was mostly weaker last night as the dollar staged a broad-based comeback on heightened Fed tightening expectations. MXN was the only EM currency to gain last week, helped by a hawkish Banxico surprise, while KRW, THB, and PLN were the worst performers and down 2-3% against the greenback. This week brings top tier U.S. economic data that could increase Fed tightening expectations even more and so EM FX remains vulnerable.
Colombia reports December IP and retail sales data Tuesday. Manufacturing is expected at 3.2% y/y vs. 4.5% in November, while sales are expected at 1.3% y/y vs. 1.7% in November. Q4 GDP data will be reported Wednesday. GDP is expected at -0.3% q/q vs. 1.6% in Q3, while the y/y rate is expected at 3.7% vs. 7.0% in Q3. The economy is clearly slowing but inflation remains too high and so the central bank continues to hike rates. That said, it is near the end of its tightening cycle and the swaps market is pricing in a final 50 bp that would see the policy rate peak near 13.25%.
Brazil reports December GDP proxy Thursday. Growth is expected at 1.40% y/y vs. 1.65% in November. After rebounding modestly in H1 2022, the economy slowed over the course of H2. No wonder President Lula has been ratcheting up his complaints about tight monetary policy. That has backfired as markets have reacted badly and MSCI Brazil has underperformed YTD within the wider MSCI EM and MSCI Latin America indices. Senate head Pacheco said lawmakers are in no mood to review the central bank autonomy law, adding that it’s more important to identify and address the root causes of higher inflation. We concur.
Turkey reports December current account and retail trade data Monday. A deficit of -$5.45 bln is expected vs. -$3.67 bln in November. If so, the 12-month total would rise to -$47.3 bln, the largest since July 2018. January central government budget balance will be reported Wednesday. Rebuilding efforts from the earthquakes will lead to a spike in government spending in the coming months and so the twin deficits are likely to continue growing. Leading business group Turkonfed estimates that the earthquakes lead to an economic cost of $84 bln, or nearly 10% of GDP.
Poland reports December current account and trade data Monday. Q4 GDP data will be reported Tuesday. GDP is expected at -0.5% q/q vs. 1.0% in Q3, while the y/y rate is expected at 2.1% vs. 3.6% in Q3. January CPI will be reported Wednesday, with headline expected at 17.6% y/y vs. 16.6% in December. If so, it would be just below the cycle peak of 17.9% in October and move further above the 1.5-3.5% target range. At the policy meeting last week, the central bank kept rates steady at 6.75% while forecasting a rapid decline in inflation after Q1. Governor Glapinski still hopes to cut rates near the end of this year. Next policy meeting is March 8 and no change is expected then. The swaps market is pricing in steady rates over the next six months followed by the start of an easing cycle in the subsequent six months, which seems very unlikely.
Hungary reports Q4 GDP data Tuesday. GDP is expected at -1.0% q/q vs. -0.4% in Q3, while the y/y rate is expected at 1.2% vs. 4.0% in Q3. The economy is clearly slowing but inflation came in at 25.7% y/y in January, the highest since February 1996 and further above the 2-4% target range. At the last policy meeting January 24, the central bank kept the base rate steady at 13.0% but pledged to maintain tight policy for a “prolonged period.” Next policy meeting is February 28 and no change is expected then. However, the swaps market is still pricing in an easing cycle this year and that seems very unlikely.
South Africa reports January CPI and December retail sales data Wednesday. Headline inflation is expected at 6.9% y/y vs. 7.2% in December, while core is expected to remain steady at 4.9% y/y. If so, headline would decelerate for the third straight month to the lowest since May 2022 and closer to the 3-6% target range. SARB delivered a dovish surprise January 26 and hiked rates 25 bp to 7.25% vs. 50 bp expected. The bank cut its 2023 and 2024 growth forecasts to just 0.3% and 0.7%, respectively. Next policy meeting is March 30 and another 25 bp hike to 7.5% seems likely, which is what the market sees as the peak policy rate. Sales are expected to remain steady at 0.4% y/y.
Israel reports January CPI Wednesday. Headline inflation is expected at 5.2% y/y vs. 5.3% in December. If so, it would be the first deceleration since September and would move it closer to the 1-3% target range. At the last policy meeting January 2, Bank of Israel hiked rates 50 bp to 3.75% and its models showed the policy rate at 4% in twelve months. This suggests that the tightening cycle is nearing an end, though Governor Yaron stressed that rates “will have to remain at a high level.” Next policy meeting is February 20 and a 25 bp hike to 4.0% is expected. Q4 GDP data will be reported Thursday, with growth expected at 2.8% SAAR vs. 1.9% in Q3.
India reports January CPI Monday. Headline is expected at 6.05% y/y vs. 5.72% in December. If so, it would be the first acceleration since September and would move back above the 2-6% target range. WPI will be reported Tuesday and is expected at 4.50% y/y vs. 4.95% in December, suggesting CPI should resume falling in the coming months. The RBI hiked the repo rate 25 bp to 6.5% last week and maintained a hawkish stance by noting “It is imperative to remain alert on inflation so as to ensure that it remains within the tolerance band and progressively aligns with the target.” Governor Das noted that “We need to see a decisive moderation in inflation.” The swaps market is now pricing in a peak policy rate at the current 6.5% but we see scope for one more 25 bp hike at the next policy meeting April 6.
Singapore releases its 2023 budget Tuesday. The government is facing a delicate balancing act between maintain fiscal prudence and providing support for households hit by high inflation. The weak global outlook also argues for caution against tightening fiscal policy too much, especially in the wake of aggressive monetary tightening by the MAS this past year. January trade data will be reported Friday, with NODX expected at -22.0% y/y vs. -20.6% in December. Like neighboring Korea and Taiwan, Singapore has yet to feel any positive impact from China reopening.
Philippine central bank meets Thursday and is expected to hike rates 25 bp to 5.75%. However, nearly half the analysts polled by Bloomberg look for a larger 50 bp move. CPI rose 8.7% y/y in January, the highest since November 20008 and further above the 2-4% target range. As such, we see risks of a hawkish surprise this week. At the last policy meeting December 15, the central bank hiked rates 50 bp and Governor Medalla signaled further tightening ahead by noting that “If I were betting my own money on whether it’s 25 or 50 bp. More likely, it could go either way, it depends on the data but it would be harder for me to bet that this is the last rate hike.” The swaps market is pricing in a peak policy rate near 6.0% but this may move higher if inflation continues to rise.
Bank Indonesia meets Thursday and is expected to keep rates steady at 5.75%. A couple of analysts polled by Bloomberg look for a 25 bp hike to 6.0%. CPI rose 5.28% y/y in January, the lowest since August 2022 but still above the 2-4% target range. At the last policy meeting January 19, the central bank hiked rates 25 bp to 5.75% and Governor Warjiyo noted that “Global economic growth this year will be slower than expected, due to the recession risk in the US and Europe, and China’s challenging exit from Covid Zero.” The bank’s focus on downside growth risks suggest the end of the tightening cycle is drawing near.