EM FX was mostly softer last week as the dollar mounted a broad-based recovery in the new year. MXN, HUF, and INR outperformed and were up marginally against USD while KRW, ZAR, and THB underperformed. U.S. data continue to come in strong and this week’s inflation data will be very important. The dollar has been able to post gains despite very little change in Fed expectations. If the data remain firm, those expectations should shift and likely lead to another leg higher for the greenback.
AMERICAS
Chile reports December CPI and trade data Monday. Headline is expected at 4.5% y/y vs. 4.8% in November. If so, it would be the lowest since July 2021 and nearing the 2-4% target range. At the last policy meeting December 19, the central bank cut rates 75 bp to 8.25% vs. 50 bp at the October 26 meeting. Next meeting is January 31 and another 75 bp cut seems likely. The swaps market is pricing in 100 bp of easing over the next three months followed by another 150 bp over the subsequent three months.
Mexico reports December CPI Tuesday. Headline is expected at 4.60% y/y vs. 4.32% in November, while core is expected at 5.14% y/y vs. 5.30% in November. At the last policy meeting December 14, the central bank kept rates steady at 11.25% and maintained its forward guidance that it will keep rates steady “for some time” after changing that guidance in November from the phrase “for an extended period.” This suggests steady rates at the next meeting February 8. The swaps market is pricing in 25 bp of easing over the next three months followed by another 50 bp of easing over the subsequent three months. November IP will be reported Thursday and is expected at 4.6% y/y vs. 5.5% in October.
Colombia reports December CPI Tuesday. Headline is expected at 9.45% y/y vs. 10.15% in November, while core is expected at 10.31% y/y vs. 10.61% in November. If so, headline would be the lowest since May 2022 but still well above the 2-4% target range. At the last policy meeting December 19, the central bank started the easing cycle with a 25 bp cut to 13.0% and Governor Villar urged caution as “We need to watch what’s happening to the sources of this inflation to see if it’s possible to keep cutting interest rates.” The vote was 5-2, with the dissents in favor of holding rates steady. The bank also announced a plan to accumulate foreign reserves of up to $200 mln per month (and $1.5 bln total) via put options. The market is pricing in 75 bp of easing over the next three months followed by another 100 bp over the subsequent three months.
Brazil reports December IPCA inflation Thursday. Headline is expected at 4.55% y/y vs. 4.68% in November. If so, inflation would be the lowest since July and would remain within the 1.75-4.75% target range. At the last COPOM meeting December 13, the central bank cut rates 50 bp for the fourth straight time to 11.75% and said, “If the scenario evolves as expected, the Committee members unanimously anticipate further reductions of the same magnitude in the next meetings.” Next meeting is January 31 and another 50 bp cut to 11.25% is expected.
Peru central bank meets Thursday and is expected to cut rates 25 bp to 6.5%. At the last policy meeting December 14, the central bank cut rates 25 bp for the fourth straight time to 6.75% and said, “We forecast that annual inflation will reach the target band within the coming months, and that annual inflation excluding food and energy will hit the target band at the end of 2023.” This suggests the easing will continue. Bloomberg consensus sees the policy rate falling to 6.25% in Q1, 5.5% in Q2, 5.0% in Q3, and 4.75% in Q4.
EUROPE/MIDDLE EAST/AFRICA
Hungary reports November retail sales Monday. Sales are expected at -6.2% y/y vs. -6.5% in October. IP will be reported Tuesday and is expected at -1.4% y/y vs. -2.8% in October. Central bank minutes will be released Wednesday. At that meeting December 19, the central bank cut the base rate 75 bp for the third straight time to 10.75% but Deputy Governor Virag said the bank had also discussed a 100 bp move. He added that “The key interest rate will be in the single-digit in the near future.” December CPI will be reported Friday. Headline is expected at 5.9% y/y vs. 7.9% in November. If so, it would be the lowest since September 2021. The swaps market is pricing in 125 bp of easing over the next three months followed by another 225 bp over the subsequent three months.
Czech Republic reports November industrial and construction output and trade data Monday. Industrial output is expected at -1.5% y/y vs. 8.0% in October. December CPI will be reported Thursday. Headline is expected to remain steady at 7.3% y/y, which was the lowest since December 2021. At the last policy meeting December 21, the central bank started the easing cycle with a 25 bp cut to 6.75% by a 7-0 vote. Governor Michl said the bank will be cautious about further cuts. Next meeting is February 8 and another 25 bp cut seems likely. November retail sales will be reported Friday and are expected at -1.6% y/y vs. -1.4% in October.
National Bank of Poland meets Tuesday and is expected to keep rates steady at 5.75%. Minutes of the December 6 meeting will be released Thursday. At that meeting, the central bank kept rates steady at 5.75% for the second straight time. Since then, inflation has continued to fall to the lowest since September 2021. The swaps market is pricing in 25 bp of easing over the next three months followed by another 25 bp over the subsequent three months. November current account and trade data will be reported Friday.
ASIA
China reports December money and new loan data sometime this week. New loans are expected at CNY1.35 trln vs. CNY1.09 trln in November, while aggregate financing is expected at CNY2.15 trln vs. CNY2.45 trln in November. CPI, PPI, and trade data will be reported Friday. CPI is expected at -0.4% y/y vs. -0.5% in November, while PPI is expected at -2.6% y/y vs. -3.0% in November. Deflationary risks remain high and so we expect further easing in the coming weeks. Elsewhere, exports are expected at 1.6% y/y vs. 0.5% in November, while imports are expected at 0.0% y/y vs. -0.6% in November.
Korea reports November current account data Tuesday. Bank of Korea meets Thursday and is expected to keep rates steady at 3.5%. At the last policy meeting November 30, the bank kept rates steady at 3.5%. Governor Rhee said the current policy rate was sufficiently restrictive but stressed that the bank is not thinking of stimulus at the moment. He said inflation was likely to converge with the 2% target by end-2024 or early 2025. The swaps market is pricing in steady rates over the next three months followed by 25 bp of easing over the subsequent three months.
Taiwan reports December trade data Tuesday. Exports are expected at 5.6% y/y vs. 3.8% in November, while imports are expected at -7.0% y/y vs. -14.8% in November. However, politics are likely to overshadow economics this week ahead of elections this coming Saturday. The most recent polls show the ruling Democratic Progressive Party candidate Lai Ching-te narrowly leading the KMT candidate Hou Yu-ih. A DPP victory would likely mean tensions with mainland China would persist.
India reports December CPI and November IP Friday. Headline inflation is expected at 5.80% y/y vs. 5.55% in November, while IP is expected at 4.0% y/y vs. 11.7% in October. At the last policy meeting December 8, the Reserve Bank of India kept rates steady at 6.5%. All six members of the MPC supported the decision and all but one voted to keep its stance at “withdrawal of accommodation.” Governor Das stressed that “It would be wrong to think or assume that a change of approach or any loosening is round the corner. It’s not on the table.” The swaps market is pricing in steady rates over the next three months followed by 50 bp of easing over the subsequent three months.
