EM FX was mostly weaker against the dollar last week. TWD, PHP, and CLP outperformed while COP, ZAR, and ARS underperformed. Sentiment on EM has been hurt by the ongoing Adani rout in India as well as some repricing of Fed tightening risks. Heightened US-China tensions over the spy balloon won’t help sentiment either. MSCI EM has retraced about half of last year’s sell-off and further gains look to be tough over the near-term. There are many Fed speakers this week and they are likely to highlight the “higher for longer” theme. Taken in conjunction with dovish hikes last week from the ECB and BOE, we believe the dollar rebound will continue this week and keep EM FX under pressure.

AMERICAS

Brazil central bank minutes will be released Tuesday. At last week’s COPOM meeting, the bank kept rates on hold at 13.75% and said "The committee emphasizes that it will persist until the disinflationary process consolidates and inflation expectations anchor around its targets," adding that it "will not hesitate to resume the tightening cycle if the disinflationary process does not proceed as expected." The bank was unhappy about recent developments in inflation expectations, “which have shown deterioration at longer horizons.” The hawkish tone led President Lula to issue a blistering critique of the bank. Investors are already worried about his fiscal policy, so the last thing they want to see is a political attack on monetary policy. January IPCA inflation and December retail sales will be reported Thursday. Inflation is expected at 5.81% y/y vs. 5.79% in December, while sales are expected at 2.6% y/y vs. 1.5% in November. If so, inflation would accelerate for the first time since June and would move further above the 1.75-4.75% target range. The swaps market is pricing in another25 bp hike over the next three months.

Chile reports January trade data Tuesday. CPI will be reported Wednesday, with headline expected at 12.1% y/y vs. 12.8% in December. If so, it would be the second straight month of deceleration to the lowest since May, but still well above the 2-4% target range. The central bank has kept rates steady since the last hike in October. At the last meeting January 26, the bank reiterated that it won’t cut rates anytime soon, noting “Inflation remains very high and its convergence to the 3% target is still subject to risks. The Board will maintain the MPR at 11.25% until the state of the macroeconomy indicates that this process has been consolidated.” Next policy meeting is April 4 and no change is expected then. However, the swaps market is pricing in the start of an easing cycle in the next three months, which seems too soon.

Banco de Mexico meets Thursday and is expected to hike rates 25 bp to 10.75%. Ahead of the decision, January CPI will be reported Thursday. Headline is expected at 7.90% y/y vs. 7.82% in December, while core is expected at 8.44% y/y vs. 8.35% in December. If so, headline would accelerate for the second straight month and move further above the 2-4% target range. The swaps market is pricing in a peak policy rate near 11.0% over the next six months, followed by the start of an easing cycle in the subsequent six months. December IP will be reported Friday and is expected at 2.0% y/y vs. 3.2% in November.

Peru central bank meets Thursday and is expected to hike rates 25 bp to 8.0%. CPI accelerated for the third straight month in January to 8.66% y/y, the highest since July and further above the 1-3% target range. However, at the last meeting January 12, the bank said “The forecast is for annual inflation to start to slow from March, and to return to the target range in the fourth quarter of this year.” This suggests the bank is nearing the end of the tightening cycle. Finance Minister Contreras will travel to the U.S. this week to meet with foreign investors in an effort to allay concerns about the ongoing political turmoil. Reports suggest the Boluarte government will announce some new economic measures this week.

EUROPE/MIDDLE EAST/AFRICA

Hungary reports December retail sales Monday. Sales are expected at 0.2% y/y vs. 0.6% in November. IP will be reported Tuesday and is expected at -0.5% y/y WDA vs. 0.8% in November. Trade, budget, and central bank minutes will be reported Wednesday. At the January 24 meeting, the bank kept the base rate steady at 13.0%. However, it said it would maintain tight policy for a “prolonged period” and mopped up liquidity by doubling commercial bank reserve ratios to 10% starting April 1. However, the swaps market is still pricing in the start of an easing cycle in the next three months. January CPI will be reported Friday, with headline expected at 25.1% y/y vs. 24.5% in December. If so, it would be the highest since March 1996 and further above the 2-4% target range. Next policy meeting is February 28 and no change is expected then.

Czech Republic reports December trade, industrial and construction output Monday. IP is expected at 3.3% y/y vs. 0.5% in November. Retail sales will be reported Tuesday and ex-auto are expected at -5.4% y/y vs. -8.7% in November. January CPI will be reported Friday, with headline expected at 17.1% y/y vs. 15.8% in December. If so, it would more than reverse last month’s deceleration to the highest since September. Czech National Bank kept rates steady at 7.0% last week and said it debated a scenario of maintain current rates for longer. Governor Michl noted that the strong koruna was tightening monetary conditions and that inflation is a bigger problem than exports. Next policy meeting is March 29 and no change is expected then. However, the swaps market is still pricing in the start of an easing cycle in H1 and that seems unlikely.

Russia reports December retail sales, construction, and unemployment Wednesday. It then reports January CPI Friday. Headline inflation is expected at 11.63% y/y vs. 11.94% in December. If so, it would continue the deceleration seen since the 17.83% peak in April but would remain far above the 4% target. Earlier Friday, the central bank meets and is expected to keep rates steady at 7.5%. At the last meeting December 16, Governor Nabiullina said that it is sending a neutral signal and that all three rate options were possible at this meeting, with the decision being data-dependent. However, she gave a hawkish hint in noting that “Due to a growing shortage of personnel, companies’ labor costs are increasing. This is evident among firm operating in industry, transport, logistics and construction. If wages grow at a rate higher than labor productivity, this may lead to an additional increase in prices through business costs.”

National Bank of Poland meets Wednesday and is expected to keep rates steady at 6.75%. Minutes from the January 4 meeting will be released Friday. At that meeting, the bank also kept rates steady and noted that future decisions will depend on Ukraine and the data. It noted that a strong zloty would help curb inflation and sees inflation returning to target gradually. CPI rose 16.6% y/y in December, the lowest since August but still well above the 1.5-3.5% target range. Prime Minister Morawiecki said that if inflation continues to fall, a rate cut becomes “possible and even likely.” The swaps market is pricing in the start of an easing cycle over the next 3-6 months, which seems too soon.

ASIA

China reports January money and new loan data sometime this next week. Aggregate financing is expected at CNY5.4 trln vs. CNY1.3 trln in December, while new loans are expected at CNY4.0 trln vs CNY1.4 trln in December. A big jump in lending in January is to be expected after the reopening steps taken in December. However, we continue to question whether the rebound can be sustained over a longer period of time. China reports January CPI and PPI data Friday. CPI is expected at 2.2% y/y vs. 1.8% in December, while PPI is expected at -0.5% y/y vs. -0.7% in December. At this point, policymakers are purely focused on boosting growth and further stimulus measures are likely this year. In its annual Article IV review of China, the IMF warned that the “real estate crisis remains unresolved” despite the policy response so far and the slump has “continued and the need for large-scale restructuring remains.”

Thailand reports January CPI Monday. Headline is expected at 5.10% y/y vs. 5.89% in December, while core is expected at 3.10% y/y vs. 3.23% in December. If so, both measures would resume the disinflation process that was under way last year. Next Bank of Thailand policy meeting is March 29 and another 25 bp hike to 1.75% is expected. At the last meeting January 25, the bank hiked 25 bp and sounded hawkish, noting “There is a risk that core inflation would remain high for longer than expected owing to a potential increase in pass-through given elevated costs. Risks of rising demand-side inflationary pressures must be monitored.” Assistant Governor Piti said then that “The economy is taking off so it’s still appropriate to raise the rate for a while. But how far we will go is the key task for the following meetings.” The swaps market is pricing in a policy rate near 2.0% over the next 12 months, which seems too gradual given the bank’s recent tone and so we look for some upward repricing in the coming weeks.

Philippines reports January CPI Tuesday. Headline is expected at 7.6% y/y vs. 8.1% in December. If so, it would be the first deceleration since August. The rate would be the lowest since September but still well above the 2-4% target range. At the last policy meeting December 15, the central bank hiked rates 50 bp to 5.5% and Governor Medalla signaled further tightening ahead, 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.” He added that the bank is no longer as concerned about matching the Fed’s moves. Next central bank policy meeting is February 16 and a 25 bp seems likely if inflation eased in January. The swaps market is pricing in a peak policy rate between 5.75-6.0%.

Malaysia reports December manufacturing sales and IP Tuesday. IP is expected at 4.5% y/y vs. 4.8% in November. Q4 GDP and current account data will be reported Friday. Growth is expected at 0.1% q/q vs. 1.9% in Q3, while the y/y rates is expected at 7.0% vs. 14.2% in Q3. Bank Negara unexpectedly left rates steady at 2.75% at its last meeting January 19 and noted “Any changes to the OPR depend on how strong the economy and prices grow,” adding that the pause will allow the bank to assess the impact of past tightening “given the lag effects of monetary policy on the economy.” The bank said headline inflation peaked in Q3 and is expected to ease further this year. December CPI came in at 3.8% y/y and continued the disinflation process and so we may see have seen the end of the tightening cycle. Next policy meeting is March 9 and the decision will depend on how the data come in.

Taiwan reports January trade data Tuesday. Exports are expected at -20.3% y/y vs. -12.1% in December, while imports are expected at -18.2% y/y vs. -11.4% in December. Weak export orders suggest little relief for shipments until mid-year at the earliest. January CPI will be reported Thursday, with headline expected at 2.70% y/y vs. 2.71% in December while core is expected at 2.90% y/y vs. 2.71% in December. The central bank does not have an explicit inflation target and so with prices remaining relatively low, it is likely to maintain relatively loose policy in order to help boost growth. Next policy meeting is March 23 and rates are likely to remain steady at 1.75%.

Reserve Bank of India meets Wednesday and is expected to hike the repo rate 25 bp to 6.5%. At the last meeting December 7, the bank hiked rates 35 bp to 6.25% and Governor Das said “Growth in India remains resilient and inflation is expected to moderate. But the battle against inflation is not over.” The bank also expects inflation to move back into the 2-6% target range in Q1. However, the trajectory was better than expected CPI came in at 5.88% in November and 5.72% in December, the lowest since December 2021. The swaps market is pricing in a peak policy rate near 6.50%, with some odds seen of a 6.75% peak. December IP will be reported Friday and is expected at 5.0% y/y vs. 7.1% in November. Of note, the growing Adani turmoil has led government officials and regulators to downplay any systemic risks.