EM FX was mostly firmer last week as the dollar came under broad-based pressure after CPI data showed ongoing disinflation. COP, THB, and IDR outperformed last week while ARS, PEN, and TRY underperformed. Until the dovish Fed narrative shifts more hawkish, EM and other risk assets should continue to build on recent gains. The China reopening story is also adding to risk on impulses, though we expect data to remain relatively weak due to ongoing viral outbreaks.

AMERICAS

Colombia reports November IP and retail sales Tuesday. Manufacturing production is expected at 4.4% y/y vs. 5.3% in November, while sales are expected at 2.5% y/y vs. 1.9% in November. November GDP proxy will be reported Wednesday and is expected at 4.0% y/y vs. 4.6% in October. November trade data will be reported Thursday. The economy continues to slow but inflation remains high at 13.12% y/y in December and so the central bank is likely to continue tightening. The next policy meeting is January 27 and a 100 bp hike to 13.0% is expected. The swaps market is pricing in a peak policy rate near 13.0% but much will depend on how inflation evolves in 2023.

EUROPE/MIDDLE EAST/AFRICA

Bank of Israel releases its minutes Monday. At the January 2 meeting, the bank hiked rates 50 bp to 3.75%. Governor Amir Yaron said rates “will have to remain at a high level,” adding “We will not hesitate to raise the interest rate in the future, and we will not hesitate to act in a more moderate manner.” The bank’s model saw the policy rate at 4.0% in twelve months vs. “above 3.5%” at the previous meeting November 21. Next policy meeting is February 20 and a 25 bp hike to 4.0% seems likely. Of note, the swaps market sees the policy rate peaking near 4.0% as well. Over the weekend, Israel reported December CPI steady at 5.3% y/y, the highest since 2008 and still well above the 1-3% target range.

South Africa reports December CPI and November retail sales Wednesday. Headline inflation is expected to fall a tick to 7.3% y/y while core is expected to rise a tick to 5.1% y/y. At the last policy meeting November 24, SARB hiked rates 75 bp to 7.0%. The vote was 3-2, with the dissents in favor of a smaller 50 bp move. Its model saw the policy rate at 6.55% at end-2023 vs. 6.36% previously, at 6.71% at end-2024 vs. 6.76% previously, and 6.83% by end-2025 in a new forecast. Next policy meeting is January 26 and a 50 bp hike to 7.5% is expected. Of note, the swaps market sees the policy rate peaking at 7.5% but much will depend on how inflation evolves in 2023. Sales are expected at -1.0% y/y vs. -0.6% in October.

Turkey central bank meets Thursday and is expected to keep rates steady at 9.0%. After cutting rates 500 bp over the course of H2 2022, the bank kept rates steady at the last meeting December 22 and noted that “Considering the increasing risks regarding global demand, the committee evaluated that the current policy rate is adequate.” We believe monetary policy has entered a new phase and that further easing will come ahead of June elections in the form of macroprudential measures. As a result, the country will continue to careen towards a full-blown economic crisis due to an unsustainable policy mix. The best that President Erdogan can hope for is that it will come after the elections.

ASIA

People’s Bank of China sets its 1-year MLF rate Monday. While consensus sees steady rates, a handful of analysts see a modest 10 bp cut to 2.65%. December IP and retail sales and Q4 GDP data will be reported Tuesday. IP is expected at 0.2% y/y vs. 2.2% in November, while sales are expected at -9.5% y/y vs. -5.9% in November. Elsewhere, GDP is expected at -1.2% q/q vs. 3.9% in Q3, which would drag the y/y rate down to 1.6% vs. 3.9% in Q3. China’s commercial banks set their Loan Prime Rates Friday. Here too, consensus sees steady rates but a handful of analysts see modest cuts.

India reports December WPI and trade data Monday. It is expected at 5.50% y/y vs. 5.85% in November. Last week, December CPI came in at 5.72% y/y, the lowest since December 2021 and the third straight month of deceleration. At the last policy meeting December 7, the Reserve Bank of India hiked the repo rate 35 bp to 6.25% by a 5-1 vote. Governor Das said then that “Growth in India remains resilient and inflation is expected to moderate. But the battle against inflation is not over.” While the size of the hike was reduced from 50 bp in September, the tone was decidedly on the hawkish side and so the tightening cycle will continue. Next meeting is February 7 and a 25 bp hike to 6.5% seems likely. The swaps market is pricing in a peak policy rate between 6.50-6.75%.

Malaysia reports December trade data Wednesday. Exports are expected at 7.2% y/y vs. 15.6% in November, while imports are expected at 16.2% y/y vs. 15.6% in November. Bank Negara meets Thursday and is expected to hike rates 25 bp to 3.0%. At the last meeting November 3, the bank hiked rates 25 bp to 2.75% and noted that it is not on any pre-set course and that future decisions will remain data dependent as well as “measured and gradual.” December CPI will be reported Friday and is expected to fall a tick to 3.9% y/y. While the bank does not have an explicit inflation target, still-high price pressures should keep the gradual tightening cycle going for now. The swaps market is pricing in a peak policy rate peak near 2.75% but we think the tightening cycle is likely to continue this week.

Bank Indonesia meets Wednesday and is expected to hike rates 25 bp to 5.75%. At the last policy meeting December 22, the bank hiked rates 25 bp to 5.5%. In downshifting to 25 bp after three straight 50 bp moves, Governor Warjiyo noted then that “BI will not raise interest rates excessively. BI will continue to assess its next interest rate moves, but our hints have been clear: inflation and inflation expectations are declining.” We note that while headline inflation appears to have peaked, core continues to accelerate and so the tightening cycle is likely to continue into 2023, albeit at a slower pace. The bank also introduced a new tool that is meant to encourage exporters repatriate their earnings onshore in order to boost dollar supply and support the rupiah.