EM Preview for the Week of February 2, 2025

February 02, 2025

EM FX was mostly weaker last week as the dollar mounted a broad-based recovery. BRL and CLP were the only ones to gain against USD, while MXN, MYR, and CZK underperformed. The strong U.S. economy, hawkish Fed, and tariff threats all conspired to push the dollar higher and those drivers are set to continue this week. Most importantly, the U.S. is pushing ahead with 25% tariffs on Canada and Mexico along with 10% tariffs on China, which should help keep EM FX and other risk assets under pressure.

AMERICAS

Brazil central bank releases its minutes Tuesday. At last week’s meeting, the bank hiked rates 100 bp to 13.25% and signaled a hike of the same magnitude at the next meeting in March due to rising inflation expectations and a resilient labor market and economy. However, it added that “Beyond the next meeting, the Committee reinforces that the total magnitude of the tightening cycle will be determined by the firm commitment of reaching the inflation target and will depend on the inflation dynamics.” The market is now pricing in another 250bp of tightening over the next 12 months that would see the policy rate peak near 15.75% vs. 16.25% before the decision.

Colombia central bank releases its minutes Wednesday. At last week’s meeting, the bank delivered a hawkish surprise and kept rates steady at 9.5% vs. an expected 25 bp cut. The vote was split, with 5 in favor of steady rates, 1 in favor of a 25 bp cut, and 1 in favor of a 50 bp cut. Governor Villar said the easing cycle can resume later but is concerned now about the impact of the recent minimum wage hike. Of note, central bank co-directors Roberto Steiner and Jaime Jaramillo saw their terms end and will be replaced by Laura Moisa and Cesar Giraldo. This is likely to lead to a dovish shift at the bank but may not be enough to tilt it in favor of a cut at the next meeting March 31. The swaps market is pricing in 125-150 bp of easing over the next 12 months that would see the policy rate bottom between 8.0-8.25%. Colombia then reports January CPI data Friday. Headline is expected at 5.10% y/y vs. 5.20% in December, while core is expected at 5.41% y/y vs. 5.65% in December. If so, headline would be the lowest since October 2021 but still above the 2-4% target range.

Banco de Mexico meets Thursday and is expected to cut rates 50 bp to 9.5%. However, we sees risks of a hawkish surprise if the peso weakness significantly this week in response to the tariffs. At the last meeting December 19, the bank cut rates 25 bp but noted that “The Board expects that the inflationary environment will allow further reference rate reductions. In view of the progress on disinflation, larger downward adjustments could be considered in some meetings, albeit maintaining a restrictive stance.” Despite the dovish guidance, the swaps market is pricing in 150 bp of total easing over the next 12 months that would see the policy rate bottom near 8.5%. January CPI data will be reported Friday. Headline is expected at 3.62% y/y vs. 4.21% in December, while core is expected at 3.70% y/y vs. 3.65% in December. If so, headline would move into the 2-4% target range for the first time since February 2021.

Chile reports January CPI and trade data Friday. Headline is expected at 4.8% y/y vs. 4.5% in December. If so, it would accelerate for the second straight month to the highest since November 2023 and move further above the 2-4% target range. No wonder the central bank delivered a hawkish hold last week. Rates were kept steady at 5.0% and the bank warned that “Inflation risks have increased, which reinforces the need for caution.” The statement noted that “the Board will evaluate the future movements of the monetary policy rate by considering the evolution of the macroeconomic scenario and its implications for the convergence of inflation.” This contrasts with the December statement, which highlighted the possibility of rate cuts “in the coming quarters.” The swaps market is now pricing in the start of a tightening cycle over the next 12 months.

EUROPE/MIDDLE EAST/AFRICA

Turkey reports January CPI data Monday. Headline is expected at 41.10% y/y vs. 44.38% in December, while core is expected at 41.50% y/y vs. 45.34% in December. If so, headline would be the lowest since June 2023 and should allow further easing. At the last meeting January 23, the central bank cut rates 250 bp for the second straight meeting and stressed that it will make its decisions meeting by meeting. Next meeting is March 6 and another 250 bp cut then seems likely. The swaps market is pricing in 1475 bp of total easing over the next 12 months that would take the policy rate to 30.25%.

National Bank of Poland meets Wednesday and is expected to keep rates steady at 5.75%. Minutes to the January meeting will be published Friday. At that January meeting, NBP left rates steady at 5.75% and reiterated that “the current level of the NBP interest rates is conducive to meeting the NBP inflation target in the medium term.” It also warned again that “in the coming quarters inflation will remain markedly above the NBP inflation target,” signaling no rush to start easing. In fact, Governor Glapinski stressed that policy rate cut discussion must be delayed for some time, adding “we as a central bank can’t ignore when inflation is double the target and forecasts don’t show it’s trending toward the target.” Still, the swaps market is pricing in 25 bp of easing over the next three months as well at 75 bp of total easing over the next 12 months.

Czech National Bank meets Thursday and is expected to cut rates 25 bp to 3.75%. At the last meeting in December, the bank pause the easing cycle. Governor Michl said a rate cut this week is “very likely” while board member Prochazka noted “the data we have seen so far appear to back my view that the fine-tuning process could resume as soon as in February.” The swaps market is pricing in 75 bp of total easing over the next 12 months that would see the policy rate bottom near 3.25%. Michl also plans to present a plan to the board to diversify as much as 5% of the CNB’s EUR140 bln of foreign reserves in bitcoin. Ahead of the decision, January CPI data will be reported. Headline is expected at 2.6% y/y vs. 3.0% in December.

ASIA

Caixin reports its January PMIs. Manufacturing will be reported Monday and is expected to rise a tick to 50.6. Its services and composite PMIs will be reported Wednesday. Services is expected to rise two ticks to 52.4. Note that the official PMIs fell sharply in January, with the composite nearing the key 50 boom/bust level. China reports January CPI and PPI data over the weekend. CPI is expected at 0.4% y/y vs. 0.1% in December, while PPI is expected at -2.2% y/y vs. -2.3% in December. With the economy weakening at the start of the year, it’s clear that deflation risks remain in place and that the PBOC will have to continue easing in 2025.

Indonesia reports January CPI data Monday. Headline is expected at 1.86% y/y vs. 1.57% in December, while core is expected at 2.29% y/y vs. 2.26% in December. If so, headline would accelerate for the second straight month to the highest since September 2023 but would remain below the 2-4% target range. At the last meeting January 15, Bank Indonesia delivered a dovish surprise and cut rates 25 bp 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, the focus of monetary policy was on maintaining IDR stability. We expect further rate cuts and currency weakness given this shift in policy.

Korea reports January CPI data Wednesday. Headline is expected at 2.1% y/y vs. 1.9% in December, while core is expected to remain steady at 1.8% y/y. If so, headline would accelerate for the third straight month to the highest since July but would be near the 2% target. Bank of Korea cut rates in October and November but unexpectedly kept rates steady at 3.0% at the last meeting January 16 and said that FX uncertainty was one of the reasons for the hold. Governor Rhee added that political stability was most important for the economy now and estimated that the exchange rate was about 30 won weaker due to political turmoil. The swaps market is pricing in 25 bp of easing over the next three months and 50 bp of total easing over the next 12 months that would see the policy rate bottoming near 2.50%. Next meeting is February 25 and much will depend on how the won is trading then.

Philippines reports January CPI data Wednesday. Headline is expected to fall a tick to 2.8% y/y. If so, this would be the first deceleration since September and would move further into the lower half of the 2-4% target range. At the last meeting December 19, the central bank cut rates 25 bp to 5.75% and noted that “The balance of risks to the inflation outlook continues to lean to the upside due largely to potential upward adjustments in transport fares and electricity rates.” Governor Remolona said that “In our discussion today, there was a sense that maybe 100 basis points over 2025 would be too much, but zero would also be too little. We have to see what the data says.” The swaps market disagrees and is still pricing in 175 bp of total easing over the next 12 months that would see the policy rate bottom near 4.0%.

Thailand reports January CPI data Wednesday. Headline is expected at 1.30% y/y vs. 1.23% in December, while core is expected at 0.84% y/y vs. 0.79% in December. If so, this would be the fifth straight month of acceleration in headline to the highest since May but would still remain in the lower half of the 1-3% target range. After starting the easing cycle with a 25 bp cut in October, Bank of Thailand kept rates steady at 2.25% at the last meeting December 18 and Assistant Governor Sakkapop Panyanukul said “We remain neutral - we are not stepping on the brake and we are not accelerating. Over the short term, the economic recovery remains on track, but we see higher risks ahead.” The swaps market is still pricing in 50 bp of easing over the next 12 months that would see the policy rate bottom near 1.75%.

Reserve Bank of India meets Thursday and is expected to cut rates 25 bp to 6.25%. However, a handful of analysts polled by Bloomberg look for steady rates and one looks for a 50 bp cut. At the last meeting December 6, the bank delivered a dovish hold as the vote to hold shifted to 4-2 from 5-1 at the October meeting, with the dissents in favor of a 25 bp cut. Furthermore, the RBI unexpectedly cut the cash reserve ratio 50 bp to 4.0%. Governor Das said that “At this critical juncture, prudence and practicality demand that we remain careful and sensitive to the dynamically evolving situation,” but added that if the economy slows further, “it may need policy support.” The swaps market is pricing in 75 bp of total easing over the next 12 months that would see the policy rate bottom near 5.75%.

Taiwan reports January CPI and trade data Friday. Headline inflation is expected at 2.5% y/y vs. 2.1% in December. While the central bank does not have an inflation target, relatively low inflation should allow it to remain on hold this year as risks to the regional economic outlook mount. Indeed, the swaps market is pricing in steady rates over the next 12 months. Elsewhere, exports are expected at 5.8% y/y vs. 9.2% in December and imports are expected at 1.9% y/y vs. 30.4% in December.

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