EM FX was mostly firmer last week as the dollar came under broad-based pressure. CLP, HUF, and PLN outperformed while TRY, ARS, and COP underperformed. At the heart of the dollar weakness was a combination of delayed tariffs and weak retail sales data. However, the knee-jerk selling ignored the elevated inflation data that suggest the Fed will not be cutting rates anytime soon. We continue to look through the noise and see the dollar rally resuming on the strong underlying fundamental story. That said, the dollar may not see any relief until Friday, when global February PMI readings should underscore the divergence theme.
AMERICAS
Banco de Mexico releases its quarterly inflation report Wednesday. The bank then publishes its minutes Thursday. At that meeting February 6, the bank cut rates 50 bp to 9.5%. It was a dovish cut as the bank said “The Board estimates that looking forward it could continue calibrating the monetary policy stance and consider adjusting it in similar magnitudes.” The swaps market has reacted to the dovish signals and is now pricing in 125 bp of further easing over the next 12 months that would see the policy rate bottom near 8.25% vs. 8.5% before the February decision.
EUROPE/MIDDLE EAST/AFRICA
South Africa reports January CPI data Wednesday. Headline is expected to pick up two ticks to 3.2% y/y while core is expected to fall a tick to 3.5% y/y. If so, headline would accelerate for the third straight month but remain near the bottom of the 3-6% target range. At the last meeting January 30, South African Reserve Bank cut rates 25 bp to 7.5% by a 4-2 vote, with the dissents in favor of steady rates. Governor Kganyago said that “The MPC would like to emphasize that its decisions will be made on a meeting-by-meeting basis, with no forward guidance and no pre-commitment to any specific rate path.” Its model saw the policy rate bottoming near 7.25% next year, little changed from November. The swaps market sees the policy rate bottoming near 7.25% over the next six months.
ASIA
Bank Indonesia meets Wednesday and is expected to keep rates steady at 5.75%. However, over a quarter of the 24 analysts polled by Bloomberg look for a 25 bp cut to 5.5%. At the last meeting January 15, the bank delivered a dovish surprise and cut rates 25 bp to 5.75% vs. an expected hold. Governor Warjiyo said “We have changed our stance, which is to pro-stability and growth. And we have said that we continue to look at the room for interest rate cuts in line with global and national economic dynamics.” Previously, he said “The focus of monetary policy is directed at strengthening the stability of the rupiah exchange rate from the impact of heightened global economic uncertainty due to U.S. policy direction and escalation of geopolitical tensions in various regions.” Given recent rupiah gains, we see some risks of a dovish surprise this week.
Malaysia reports January CPI data Friday. Headline is expected to pick up a tick to 1.8% y/y. At the last meeting January 22, Bank Negara kept rates steady at 3.0% and suggested again that cuts are not in the pipeline just yet as the policy statement noted that “The monetary policy stance remains supportive of the economy and is consistent with the current assessment of inflation and growth prospects.” The bank also highlighted that “the strength in economic activity is expected to be sustained in 2025” while “inflation is expected to remain manageable.” While the bank does not have an explicit inflation target, low price pressures should allow it to ease this year if the economy slows. Indeed, the swaps market is pricing in 25 bp of easing over the next 12 months.
