EM FX was mixed last week despite broad-based dollar weakness against the majors. CLP, CNY, and KRW outperformed while RUB, COP, and BRL underperformed. For all of 2022, only four currencies were firmer against the dollar: BRL (6%), MXN (5%), PEN (5%), and CLP (0.1%), while the worst performers were ARS (-42%), TRY (-30%),COP (-16%), HUF (-13%), and INR (-10%). We do not think 2023 offers much relief as global liquidity tightens further and much of the world falls into recession. China is the wild card here and we think markets are overestimating its ability to reopen smoothly. Bottom line: EM FX is likely to remain under pressure this year, particularly in H1.
AMERICAS
Chile reports November GDP proxy Tuesday. It is expected at -3.0% y/y vs. -1.2% in October. It then reports December CPI and trade data Friday. Headline inflation is expected at 12.8% y/y vs. 13.3% in November. If so, it would continue the deceleration from the 14.1% peak in August. At the last policy meeting December 6, the bank left rates steady at 11.25% but took a hawkish tone by noting that “Prematurely starting the process of lowering the MPR might have adverse effects on inflationary persistence and, therefore, on economic activity, as sensitivity scenarios could materialize that would force a pause or even a reversal of the process. Plus, this could adversely affect monetary policy communication and the Bank’s credibility.” Next policy meeting is January 26 and no change is expected then. The swaps market is pricing in the start of an easing cycle in Q1 but that seems too soon.
Colombia reports December CPI Thursday. Headline is expected at 12.75% y/y vs. 12.53% in November. If so, it would be the highest since March 1999 and further above the 2-4% target range. At the last policy meeting December 16, the central bank hiked rates 100 bp to 12.0%. Governor Villar said inflation continues to surprise on the upside but added that the bank is nearing the end of its tightening cycle. Next policy meeting is January 27 and another 100 bp hike to 13.0% seems likely. The swaps market is pricing in a peak policy rate near 13.0% but much will depend on how inflation evolves in 2023.
Brazil reports November IP Thursday. It is expected at 0.7% y/y vs. 1.7% in October. President Lula took office this weekend and inherits an economy that is recovering modestly. All eyes are on fiscal policy as the incoming economic team is dominated by the leftist PT. Of note, incoming Petrobas CEO Prates said existing fuel tax exemptions would be extended in order to keep prices down. However, markets are bracing for higher inflation due to fiscal stimulus, which would likely delay the start of rate cuts. The swaps market is pricing in an easing cycle in Q2, which seems too soon.
Banco de Mexico release its minutes Thursday. At that policy meeting December 15, the bank hiked rates 50 bp to 10.50% and said “The Board considers it will still be necessary to raise the reference rate in its next monetary policy meeting” February 9. It added that “Subsequently, it will assess if the reference rate needs to be further adjusted as well as the pace of adjustments based on the prevailing conditions.” We expect another 50 bp hike to 11.0% next month. The swaps market is pricing in a peak policy rate near 11.0% but much will depend on how inflation develops and also on Fed policy.
EUROPE/MIDDLE EAST/AFRICA
Turkey reports December CPI Tuesday. Headline is expected at 66.75% y/y vs. 84.39% in November, while core is expected at 53.60% y/y vs. 68.91% in November. While policymakers will be quick to claim victory over inflation, we note that higher base effects from 2021 is the major reason. Base effects will remain high in January but then quickly subside, meaning a significant drop in inflation is unlikely in 2023. At the last policy meeting December 22, the central bank kept rates steady at 9.0%, as expected. The bank noted that “Considering the increasing risks regarding global demand, the committee evaluated that the current policy rate is adequate.” Monetary policy has entered a new phase as rate cuts are likely to be replaced by macroprudential easing ahead of June elections, which should add to price pressures.
National Bank of Poland meets Wednesday and is expected to keep rates steady at 6.75%. December CPI will be reported Thursday, with headline expected to fall a tick to 17.4% y/y. If so, it would continue the deceleration from the 17.9% peak in October. Minutes to the December 7 meeting will also be released Thursday. At that meeting, the bank left rates steady at 6.75% even as Governor Glapinski said that the tightening cycle is paused and that the bank did not discuss ending rate hikes. That said, the swaps market is pricing in steady rates over the near-term with some risks of a final 25 bp hike to 7.0% over the next twelve months.
ASIA
Singapore reports advance Q4 GDP data Tuesday. Growth is expected at 2.1% y/y vs. 4.1% in Q3. November retail sales will be reported Thursday, with headline expected at 7.8% y/y vs. 10.4% in October. In his New Year’s Eve message, Prime Minister Lee warned “We must brace ourselves for the uncertainties ahead. Our economy will be affected.” He saw growth between 0.5-2.5% in 2023, down from 3.5% forecast for 2022 and added that “How quickly China recovers from Covid-19 remains to be seen, while the US and EU may well enter recession.” If inflation and growth continue to slow, we expect the MAS will leave policy unchanged at its next meeting in April.
Philippines reports December CPI Tuesday. Headline is expected at 8.3% y/y vs. 8.0% in November. If so, it would be the highest since November 2008 and further above the 2-4% target band. At the last policy meeting December 15, the central bank hiked rates 50 bp to 5.5% and Governor Medalla signaled further tightening ahead by 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 policy meeting is February 16 and another 50 bp hike to 6.0% seems likely. The swaps market is pricing in a peak policy rate near 6.0% but this may move higher if inflation continues to rise.
Caixin reports December manufacturing PMI Thursday. It is expected at 49.0 vs. 49.4 in November. Services and composite PMIs will be reported Wednesday. Services is expected at 46.8 vs. 46.7 in November. Over the weekend, official PMI readings came in much weaker than expected. Manufacturing came in at 47.0 vs. 47.8 expected and 48.0 in November, while non-manufacturing came in at 41.6 vs. 45.0 expected and 46.7 in November and dragged the composite lower to 42.6 vs. 47.1 in November. Of note, China Beige Book International warned of potential contraction in Q4 GDP and added that full-year growth likely slowed to a mere 2%. While more stimulus is expected this year, growth is likely to remain uneven and subpar due to ongoing viral outbreaks.
Thailand reports December CPI Thursday. Headline is expected at 5.90% y/y vs. 5.55% in November, while core is expected at 3.28% y/y vs. 3.22% in November. If so, this would be the first acceleration in headline since August and would move further above the 1-3% target range. At the last policy meeting November 30, the Bank of Thailand hiked rates 25 bp to 1.25% and noted that “Economic recovery will be on track, albeit with risks to inflation. Given the heightened uncertainties surrounding the global economy, the Committee is ready to adjust the size and timing of policy normalization should the growth and inflation outlook shift from the current assessment.” Next policy meeting is January 25 and another 25 bp hike to 1.5% is expected. The swaps market is pricing in a policy rate near 2.0% over the next 12 months, rising gradually to 2.5% over the subsequent 24 months.
Taiwan reports December CPI Friday. Headline is expected at 2.53% y/y vs. 2.35% in November, while core is expected at 2.50% y/y vs. 2.86% in November. December trade data will be reported Saturday. Exports are expected at -12.1% y/y vs. -13.1% in November, while imports are expected at -9.7% y/y vs. -8.6% in November. At the last policy meeting December 15, the central bank hiked rates 12.5 bp to 1.75%. Governor Yang said weak exports were the main reason behind slower growth while noting that falling oil and commodity prices have helped lower import prices and inflation generally. He added “We will be careful of the risks of a slowing economy, but our key focus remains on stabilizing the cost of living.” The swaps market is pricing in no more hikes but much will depend on the global economic outlook, especially China.
