EM FX was mixed last week despite the broad dollar rally against the majors. THB, KRW, and IDR outperformed while CLP, CZK, and BRL underperformed. Many EM central banks continue to cut rates aggressively to help offset the global slowdown. However, with the Fed unlikely to cut anytime soon, narrowing interest rates differentials will take a toll on their currencies.
AMERICAS
Brazil reports December current account and FDI data Monday. Central bank minutes will be released Tuesday. At last week’s COPOM meeting, the bank cut rates 50 bp to 11.25% and said that pace would be maintained for the next several meetings. The swaps market is pricing in 175 bp of easing over the next 12 months that would see the policy rate bottom at 9.5%. December consolidated budget and retail sales data will be reported Wednesday. A primary deficit of -BRL121.0 bln is expected vs. -BRL37.3 bln in November. January IPCA inflation will be reported Thursday, with headline expected at 4.42% y/y vs. 4.62% in December. If so, it would be the fourth straight deceleration to the lowest since July and within the new 1.5-4.5% target range for this year.
Colombia central bank releases its minutes Monday. At last week’s meeting, the bank delivered a hawkish surprise and cut rates 25 bp to 12.75% vs. 50 bp expected. January CPI will be reported Wednesday. Headline is expected at 8.35% y/y vs. 9.28% in December, while core is expected at 9.64% y/y vs. 10.33% in December. If so, headline would be the lowest since February 2022 but still well above the 2-4% target range. The swaps market is pricing in 450 bp of easing over the next 12 months, followed by another 150 bp over the subsequent 12 months that would see the policy rate bottom at 6.75%.
Chile reports January trade data Wednesday. January CPI will be reported Thursday. Headline is expected at 3.4% y/y vs. 3.9% in December. If so, it would be the lowest since April 2021 and further within the 2-4% target range. The central bank accelerated its easing with a 100 bp cut last week to 7.25%. One policymaker favored a larger 125 bp move and so the aggressive easing should continue. The swaps market is pricing in 325 bp of easing over the next 12 months that would see the policy rate bottom at 4.0%.
Banco de Mexico meets Thursday and is expected to keep rates steady at 11.25%. Ahead of the decision, Mexico reports January CPI data. Headline is expected at 4.89% y/y vs. 4.66% in December. If so, it would be the third straight month of acceleration to the highest since June. No wonder Banco de Mexico remains hawkish. We expect a hawkish hold this week and a cut at the next meeting March 21 will only be possible if inflation starts to fall again. The swaps market is pricing in 25 bp of easing over the next three months, followed by another 50 bp over the subsequent three months. December IP will be reported Friday and is expected at 1.0% y/y vs. 2.8% in November.
Peru central bank meets Thursday and is expected to cut rates 25 bp to 6.25%. Since the easing cycle began in September, the bank has cut rates 25 bp at every meeting and is likely to continue this pace. The market sees the policy rate bottoming at 4% by end-2025.
EUROPE/MIDDLE EAST/AFRICA
Turkey reports January CPI Monday. Headline is expected at 64.56% y/y vs. 64.77% in December, while core is expected at 68.80% y/y vs. 70.64% in December. If so, it would be the first deceleration in core since last April. The abrupt resignation of central bank Governor Erkan is concerning, but incoming Governor Karahan said, “We are determined to maintaining the necessary monetary tightness until inflation falls to levels consistent with our target.” The current policy rate of 45% is nowhere near high enough to lower inflation and stabilize the lira, and yet the market is already pricing in 250 bp of easing over the next three months followed by more aggressive cuts over the next three years that see the policy rate bottoming around 16.75%. The central bank releases its quarterly inflation report Thursday. December IP will be reported Friday.
Hungary reports December trade data Monday. IP and retail sales will be reported Tuesday. IP is expected at -7.8% y/y vs. -5.6% in November, while sales are expected at -2.2% y/y vs. -5.4% in November. January CPI will be reported Friday. Headline is expected at 4.3% y/y vs. 5.5% in December. If so, it would be the lowest since March 2021 and nearing the 2-4% target range. The central bank cut the base rate 75 bp to 10.0% last week. 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%.
Czech Republic reports December construction and industrial production and trade data Tuesday. Retail sales will be reported Wednesday. Sales ex-auto are expected at 0.7% y/y vs. 0.9% in November. Czech National Bank meets Thursday and is expected to cut rates 25 bp to 6.5%. However, the market is split as nearly half of the analysts polled by Bloomberg look for a larger 50 bp cut. We believe the risk is that the bank eases more aggressively. Vice Governor Frait warned he was prepared to back at least a 50 bp cut, “certainly more than 25” as household demand and inflation pressures, were softening. Meanwhile, CNB board member Holub said he was “pretty open to discussing a 50 bp cut.” The market is pricing in 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 3.25%. However, the easing cycle will depend in large part on the persistence of the broad disinflationary trend currently underway. The CNB will provide updated macroeconomic projections in its February Monetary Policy Report.
National Bank of Poland meets Wednesday and is expected to keep rates steady at 5.75%. The market is pricing in roughly 75 bp of easing over the next 12 months as the slowdown in core and headline CPI inflation are intact. The extent to which the NBP eases further will depend in large part on the impact of fiscal and regulatory policies on price developments. Indeed, Governor Glapinski warned that a rate hike cannot be ruled out if the policy committee learns in March that inflation will surge. The bank publishes new economic projections in March and uncertainty over fiscal policy should wane by then. Minutes to the January 9 meeting will be released Friday.
ASIA
Caixin reports January services and composite PMIs Monday. Services is expected to rise a tick to 53.0. China reports January CPI and PPI Thursday. CPI is expected at -0.5% y/y vs. -0.3% in December, while PPI is expected at -2.6% y/y vs. -2.7% in December. Deflation risks are not going away anytime soon and so we expect further easing by the PBOC in the coming months.
Thailand reports January CPI Monday. Headline is expected at -0.82% y/y vs. -0.83% in December, while core is expected at 0.60% y/y vs. 0.58% in December. If so, deflation would continue for the fourth straight month. Bank of Thailand meets Wednesday and is expected to keep rates steady at 2.5%. At the November meeting, the bank said that the current level of rates was appropriate “for supporting long-term sustainable growth” while Assistant Governor Piti said rates are likely to remain steady for a while. The swaps market is pricing in steady rates over the next three months followed by the start of an easing cycle over the subsequent three months with 25 bp of easing.
Philippines reports January CPI Tuesday. Headline is expected at 3.1% y/y vs. 3.9% in December. If so, it would be the lowest since February 2022 and further within the 2-4% target range. After the intra-meeting hike in October, the Philippine central bank has kept rates steady at two meetings. At the last meeting in December, the bank signaled comfort with its current policy settings and remained far from a pivot. Next central bank meeting is February 15, and no change is expected then. The swaps market is pricing in steady rates over the next three months, followed by the start of an easing cycle with 75 bp of easing over the subsequent three months.
Taiwan reports January CPI Monday. Headline is expected at 2.30% y/y vs. 2.71% in December. If so, it would be the lowest since July. While the central bank does not have an explicit inflation target, easing price pressures should allow it to remain on hold for on before eventually cutting rates. The market is pricing in steady rates over the next 12 months, followed by the start of a modest easing cycle over the subsequent 12 months. December trade data will be reported Wednesday. Exports are expected at 18.6% y/y vs. 11.8% in December, while imports are expected at -9.1% y/y vs. -6.5% in December.
Reserve Bank of India meets Thursday and is expected to keep rates steady at 6.5%. After keeping rates steady at the December 8 meeting, Governor Das stressed that “It would be wrong to think or assume that a change of approach or any loosening is round the corner. It’s not on the table.” Nonetheless, the swaps market sees steady rates over the next three months followed by the start of an easing cycle with a 25 bp cut over the subsequent three months.
