EM FX was mixed last week despite growing risk off impulses. PEN, THB, and MYR outperformed while MXN, BRL, and CZK underperformed. Besides the haven bid, recent yen outperformance has also been underpinned by expectations of a more aggressive BOJ tightening cycle. Indeed, the ongoing unwind in yen carry trades may have turbo-charged the recent sell-off in higher-yielding EM currencies. This week will be key, with the FOMC and BOJ decisions Wednesday and the jobs report Friday likely to determine the near-term outlook for EM FX.
AMERICAS
Brazil reports June consolidated budget data Monday. A primary deficit of -BRL39.5 bln is expected vs. -BRL63.9 bln in May. Last week, the central government budget deficit came in a bit larger than expected at -BRL38.8 bln. COPOM meets Wednesday and is expected to keep rates steady at 10.5%. At the June meeting, the bank voted unanimously to “interrupt” the easing cycle and kept rates steady at 10.5%. We expect the bank to reiterate “that monetary policy should continue being contractionary for sufficient time” as IPCA inflation unexpectedly quickened to a 5-month high of 4.45% y/y in mid-July. The swaps market is pricing in nearly 200 bp of tightening over the next 12 months. However, central bank chief Roberto Campos Neto last month pushed back against rate hike expectations by noting “It’s not our base case scenario.”
Colombia central bank meets Wednesday and is expected to cut rates 50 bp to 10.75%. At the last meeting June 28, the bank cut rates 50 bp to 11.25%. The vote was 4-2, with the dissents in favor of a larger 75 bp cut. Governor Villar said rate cuts would continue but stressed that the bank needs to see a faster drop in inflation in order to cut at a faster rate. The improvement in headline inflation has stalled in the past few months, supporting the case for a 50 bp cut rather than 75 bp this week. The swaps market is pricing around 300 bp of easing over the next 12 months that would see the policy rate bottom near 8.25%. The bank releases its quarterly inflation report Friday.
Chile central bank meets Wednesday and is expected to cut rates 25 bp to 5.5%. A couple of analysts polled by Bloomberg see steady rates. At the last meeting June 18, the bank cut rates 25 bp to 5.75%. The vote was 4-1, with the dissent in favor of a larger 50 bp cut. The bank signaled that the end of the easing cycle is nearing by noting “The board estimates that, if the assumptions of the central scenario materialize, the monetary policy rate would have accumulated the bulk of the cuts planned for this year during the first half.” The swaps market is pricing in 75 bp of total easing over the next 12 months. Ahead of the decision, Chile reports June IP, retail sales, and unemployment. June GDP proxy will be reported Thursday.
Peru reports July CPI Thursday. Headline is expected at 2.27% y/y vs. 2.29% in June. If so, it would remain well within the 1-3% target range. However, the central bank has kept rates steady at 5.75% for two straight meetings due to persistent core inflation. Next meeting is August 8 and whether it can resume cutting rates will depend on largely on whether July core inflation eases from the cycle high of 3.12% y/y in June.
EUROPE/MIDDLE EAST/AFRICA
Poland reports July CPI Wednesday. Headline is expected at 4.5% y/y vs. 2.6% in June. If so, headline would be the highest since December and above the 1.5-3.5% target range. A large 1.7% m/m jump is expected due to a one-off increase in energy prices for households. At the last meeting July 3, the central bank kept rates steady and warned inflation would not start falling until after Q1. Next meeting is September 4 and rates are likely to be kept steady at 5.75% again. The swaps market is pricing in steady rates over the next three months, followed by 25 bp of easing over the subsequent three months.
Czech National Bank meets Thursday and is expected to cut rates 25 bp to 4.50%. At the last meeting June 27, the delivered a dovish surprise and cut rates 50 bp to 4.75% vs. 25 bp expected. However, Governor Michl said then that the pace of easing was likely to slow in the coming meetings and added that next move was likely to be either a 25 bp cut or a pause. The swaps market is pricing in 100 bp of total easing over the next 12 months.
ASIA
China reports official July PMIs Wednesday. Manufacturing is expected at 49.3 vs. 49.5 in June, while non-manufacturing is expected at 50.2 vs. 50.5 in June. IF so, the official composite would fall close to 50.0 from 50.5 in June. Caixin reports manufacturing PMI Thursday and is expected at 51.5 vs. 51.8 in June. We believe the Caixin PMIs have been overstating growth in China and that the official readings are closer to the mark. Indeed, the weak economy clearly led the PBOC to unexpectedly cut rates last week.
Korea reports June IP Wednesday. It is expected at 2.8% y/y vs. 3.5% in May. July trade data will be reported Thursday. Exports are expected at 18.6% y/y vs. 5.1% in June, while imports are expected at 13.4% y/y vs. -7.5% in June. July CPI will be reported Friday. Headline is expected to rise a tick to 2.5% y/y while core is expected to fall a tick to 2.1% y/y. If so, headline would remain above the 2% target. At the last meeting July 11, Bank of Korea delivered a dovish hold. It kept rates steady at 3.5%, as expected, but said that it will consider rate cut timing while assessing the outlook for inflation and financial stability. The decision was unanimous, but Governor Rhee said that excluding him, four BOK members saw steady rates over the next three months and two were open to a rate cut during that same period. Rhee also noted that “Market expectations for a cut are somewhat excessive.” The next meeting is August 22, and this seems too soon for a cut. Indeed, the market still sees steady rates over the next three months, followed by 25 bp of easing over the subsequent three months.
Indonesia reports July CPI Thursday. Headline is expected at 2.40% y/y vs. 2.51% in June, while core is expected to remain steady at 1.90% y/y. If so, headline would be the lowest since September and well within the 1.5-3.5% target range. At the last meeting July 17, Bank Indonesia left rates steady at 6.25% for the third straight time. Governor Warjiyo signaled that he is no hurry to cut rates, stressing “The focus of monetary policy in the short-term is directed at strengthening rupiah exchange rate stabilization and attracting foreign portfolio inflows.” However, he added that “Our inflation is low, and our economic growth is good, that’s why I said there is room to lower the interest rate, if there’s no global influence.” Next meeting is August 21, and no change is expected then. However, if the Fed cuts at the September 17/18 meeting, we believe Indonesia will follow suit in Q4.
