EM FX was mostly lower last week as the dollar’s broad-based rally continued. COP, IDR, and BRL outperformed and eked out small gain, while CLP, HUF, and MXN underperformed and lost 2-3% against the dollar. This week’s U.S. data should confirm that the Fed was right to pivot more hawkish. If so, the dollar should continue to gain.
AMERICAS
Chile central bank releases its minutes Monday. At that December 17 meeting, the central bank cut rates 25 bp to 5.0% and signaled a new phase as Governor Costa noted that inflation will be around 5% in early 2025, a level that she called “uncomfortable” even as she stressed that “From here on, it shouldn’t be surprising that we enter a stage in which there are pauses.” The swaps market is not pricing in any further easing for this cycle. December trade data will be reported Tuesday. December CPI data will be reported Wednesday and headline is expected at 4.7% y/y vs. 4.2% in November. If so, it would reverse the November drop and move further above the 2-4% target range.
Mexico reports December CPI data Thursday. Headline is expected at 4.25% y/y vs. 4.55% in November, while core is expected at 3.61% y/y vs. 3.58% in November. If so, headline would be the lowest since February 2021 and nearing the 2-4% target range. Banco de Mexico also publishes its minutes Thursday. At the December 19 meeting, the bank cut rates 25 bp to 10.0% by a unanimous decision. However, it noted “The Board expects that the inflationary environment will allow further reference rate reductions. In view of the progress on disinflation, larger downward adjustments could be considered in some meetings, albeit maintaining a restrictive stance.” Despite the dovish guidance, the swaps market is pricing in only 100-125 bp of easing over the next 12 months that would see the policy rate bottom between 8.75-9.0%.
Colombia reports December CPI data Thursday. Headline is expected at 5.16% y/y vs. 5.20% in November, while core is expected at 5.60% y/y vs. 5.88% in November. If so, headline would be the lowest since October 2021 but still above the 2-4% target range. At the last meeting December 20, the bank delivered a hawkish surprise and cut rates 25 bp to 9.5% vs. 50 bp expected. The vote was 5-2, with one dissent in favor of a 50 bp move and another one in favor of a 75 bp move. Governor Villar said the weak peso and hawkish Fed guidance were behind the “prudent” cut. The swaps market is pricing in 100 bp of total easing over the next 12 months that would see the policy rate bottom near 8.5%.
Peru central bank meets Thursday and is expected to cut rates 25 bp to 4.75%. However, the market is split as nearly half the analysts polled by Bloomberg see steady rates. At the last meeting December 12, the central bank kept rates steady at 5.0% and noted that “The board is especially attentive to new information about inflation and its determinants, including core inflation, inflation expectations and economic activity to consider, if necessary, additional modifications in the monetary policy stance.” Since then, headline inflation has eased while core has picked up while the sol has weakened. As such, we lean towards a hold this week but expect the cautious easing cycle to resume later in 2025.
Brazil reports December IPCA inflation Friday. Headline is expected at 4.86% y/y vs. 4.87% in November. If so, it would be the first deceleration since August but would remain above the 1.5-4.5% target range. Next COPOM meeting is January 29 and the CDI market is pricing in a 125 bp hike to 13.5%. Looking ahead, the swaps market is pricing in a peak policy rate near 16.5% over the next 12 months. November IP will be reported Wednesday and is expected at 1.8% y/y vs. 5.8% in October. Retail sales will be reported Thursday and are expected at 4.0% y/y vs. 6.5% in October.
EUROPE/MIDDLE EAST/AFRICA
Bank of Israel meets Monday and is expected to keep rates steady at 4.5%. At the last meeting November 25, the bank kept rates steady whilst noting that “There are several risks of a possible acceleration of inflation: geopolitical developments and their impact on economic activity, prolonged supply limitations, volatility of the shekel, and fiscal developments.” The swaps market is pricing in steady rates over the next three months followed by 25 bp of easing over the subsequent three months.
ASIA
China reports December new loan and money supply data sometime this week. New loans are expected at CNY728 bln vs. CNY578 bln in November, while aggregate financing is expected at CNY2.158 trln vs. CNY2.326 trln in November. Caixin reports December services and composite PMIs Monday. Services is expected to fall a tick to 51.4. December CPI and PPI data will be reported Thursday. CPI is expected to fall a tick to 0.1% y/y while PPI is expected to rise a tick to -2.4% y/y. Clearly, deflation risks remain in play and will require a much more significant policy response than what we’ve seen already.
Thailand reports December CPI data Monday. Headline is expected at 1.40% y/y vs. 0.95% in November, while core is expected at 0.90% y/y vs. 0.80% in November. If so, headline would be the highest since April 2023 and back within the 1-3% target range. At the last meeting December 18, Bank of Thailand kept rates steady at 2.25% and the vote was unanimous. Assistant Governor Sakkapop Panyanukul said “We remain neutral - we are not stepping on the brake and we are not accelerating. Over the short term, the economic recovery remains on track, but we see higher risks ahead.” The swaps market is still pricing in 50 bp of easing over the next 12 months that would see the policy rate bottom near 1.75%.
Philippines reports December CPI data Tuesday. Headline is expected to pick up a tick to 2.6% y/y. If so, it would be the third straight month of acceleration to the highest since August but still well within the 2-4% target range. At the last meeting December 19, central bank cut rates 25 bp to 5.75%, as expected. It 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 would seem to agree and is pricing in 75 bp of total easing over the next 12 months.
Taiwan reports December CPI data Tuesday. Headline is expected at 2.10% y/y vs. 2.08% in November, while core is expected at 1.70% y/y vs. 1.74% in November. While the central bank does not have an explicit inflation target, low price pressures should allow it to remain on hold this year. Indeed, the swaps market is pricing steady rates over the next 12 months. At the last meeting December 19, central bank kept rates steady at 2.0%, as expected. Governor Yang noted then that “We still don’t know when the tariff policy will be implemented and how big it will be. How other countries will retaliate is very uncertain.” December trade data will be reported Thursday. Exports are expected at 6.0% y/y vs. 9.7% in November, while imports are expected at 15.5% y/y vs. 19.8% in November.
