EM FX was mixed last week despite broad dollar weakness against the majors. COP, CLP, and ZAR outperformed while INR, CNY, an TRY underperformed. The dollar rallied on Friday on reports that Trump would announce reciprocal tariffs this week on all U.S. trading partners. It seems that rather than announce universal tariffs, Trump would instead put “the exact same tariff” on those countries that are levying tariffs on U.S. goods. Reciprocal tariffs, along with U.S. inflation and retail sales data this week, should keep the Fed on hold for the foreseeable future even as other central banks are easing. These drivers should keep downward pressure on EM FX.
AMERICAS
Brazil reports January IPCA inflation Tuesday. Headline is expected at 4.58% y/y vs. 4.83% in December. If so, it would be the second straight month of deceleration to the lowest since September and nearing the 1.5-4.5% target range. At the last policy meeting January 29, the central bank cut rates 100 bp for the second straight time and promised another one at the March 19 meeting. The swaps market is pricing in 275 of total tightening over the next 12 months that would see the policy rate peak near 16.00%.
Chile central bank minutes will be released Wednesday. At that January 28 meeting, the bank delivered a hawkish hold and 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 pricing in the start of a tightening cycle over the next 12 months.
Peru central bank meets Thursday and is expected to keep rates steady at 4.75%. However, a third of the analysts polled by Bloomberg look for a 25 bp cut to 4.5%. Since October, the bank has been cutting every other meeting as it maintains a cautious pace due to sticky core inflation. If it sticks to this pattern, it should remain on hold this week after cutting rates 25 bp at the January 9 meeting. January inflation cooled, with headline coming in at 1.85% y/y vs. 2.0% expected and 1.97% in December while core fell to 2.43% y/y vs. 2.60% in December and was the lowest since August 2021. As such, we see risks of a dovish surprise.
EUROPE/MIDDLE EAST/AFRICA
Hungary reports January CPI data Tuesday. Headline is expected to rise two ticks to 4.8% y/y. If so, it would be the highest since December 2023 and move further above the 2-4% target range. Central bank minutes will be released Wednesday. At that January 28 meeting, the bank kept rates steady for the fourth straight month. Deputy Governor Virag said that “tight monetary conditions” were necessary as upside risks have materialized, adding that “This is a new situation in a qualitative sense.” Despite this hawkish guidance, the swaps market is still pricing in a 25 bp cut over the next 12 months followed by another 25 bp cut over the subsequent 12 months.
Czech National Bank minutes will be released. At that February 6 meeting, the bank cut rates 25 bp to 3.75% as “short-term inflationary risks are not materializing yet and external demand remains subdued.” Governor Michl said it was a “hawkish” cut and cautioned that rates will probably remain above the trajectory implied in the central bank’s updated baseline forecasts, which implies the policy falling to 3.00%. Michl added the board wants to avoid the risk of real interest rates becoming negative. The swaps market is pricing in 100 bp of easing over the next 12 months that would see the policy rate bottom near 2.75%.
Poland reports January CPI data Friday. Headline is expected at 5.0% y/y vs. 4.7% in December. If so, it would be the highest since October and move further above the 1.5-3.5% target range. No wonder the National Bank of Poland kept rates steady at 5.75% last week and reiterated that “in the coming quarters inflation will remain markedly above the NBP inflation target,” signaling no rush to start easing. The swaps market is pricing in 25 bp of easing over the next three months and 75 bp of total easing over the next 12 months.
Israel reports January CPI data Friday. Headline is expected at 3.7% y/y vs. 3.2% in December. If so, it would be the highest since October 2023 and move further above the 1-3% target range. At the last meeting January 6, Bank of Israel kept rates steady at 4.5% and Governor Yaron said that “To lower rates now would be similar to trying to take out a fire using fuel. Because labor shortages are a major obstacle, lowering rates will increase demand without increasing supply, so it will just bring on price rises.” Next meeting is February 24 and another hold then is expected. However, the swaps market is pricing in 25 bp of easing over the next six months followed by another 50 bp over the subsequent six months.
ASIA
China reports January money and new loan data sometime this week. New loans are expected at CNY4.53 trln vs. CNY995 bln in December, while aggregate financing is expected at CNY6.4 trln vs. CNY2.851 bln in December. In recent years, lending tends to jump in January and then fall back in February and so we expect this pattern to continue this year. With deflationary risks persisting, we expect further easing by the PBOC this year.
India reports January CPI data Wednesday. Headline is expected at 4.50% y/y vs. 5.22% in December. If so, it would be the lowest since August and nearing the center of the 2-6% target range. No wonder Reserve Bank of India cut rates 25 bp to 6.25% last week. The bank also noted it would “continue with the neutral monetary policy stance and remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth.” This was the first meeting under new Governor Malhotra and marked the first rate cut since 2020 after holding rates at 6.50% for almost two years. The swaps market is pricing in 25 bp of further easing over the next 12 months followed by another 25 bp over the subsequent 12 months that would see the policy rate bottom at 5.75%.
Philippines central bank meets Thursday and is expected to cut rates 25 bp to 5.5%. At the last meeting December 19, the 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 bp 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 pricing in 150 bp of total easing over the next 12 months that would see the policy rate bottom near 4.25%.
