EM Preview for the Week of June 11, 2023

June 11, 2023

EM FX was mixed last week despite broad-based dollar weakness against the majors. COP,ZAR, and BRL outperformed while TRY, ARS, and MYR underperformed. The backdrop for EM remains difficult, with virtually every major central bank hiking rates even higher for even longer even as global growth continues to disappoint. We believe the dollar rally remains intact as the Fed is likely to either deliver a hawkish surprise or a skip coupled with a commitment to hike in July.


Brazil reports April retail sales Wednesday. Headline sales are expected at 1.2% y/y vs. 3.2% in March, while broad sales are expected at 2.4% y/y vs. 8.8% in March. April GDP proxy will be reported Friday and is expected at 1.51% y/y vs. 5.46% in March. The recovery appears to be running out of steam and so with inflation back within the target range, the central bank should start an easing cycle soon. The June 21 meeting is probably too soon but the market is pricing in a 25 bp cut to 13.0% at the August 2 meeting. BLR is the fourth best performing EM currency YTD. USD/BRL is trading at the lowest since June 2022 near 4.881 and the next target is the May 2022 low near 4.6915.

Colombia reports April IP and retail sales Thursday. Similar to Brazil, the recovery is showing signs of weakening and the market is pricing in the start of an easing cycle over the next three months. Next policy meeting is June 30 and no change is expected then. COP is the top performing EM currency YTD as the combination of high yields and potential political gridlock attracts foreign investors. The prospects of gridlock here are positive as markets never trusted the policies of leftist President Petro. USD/COP is trading at the lowest since August 2022 near 4186 and a break below that month’s low near 4155 would set up the next target as the May 2022 low near 3759.


Czech Republic reports May CPI Monday. Headline is expected at 10.8% y/y vs. 12.7% in April. If so, it would be the lowest since January 2022 but still well above the 1-3% target range. At the last policy meeting May 3, the central bank kept rates steady at 7.0% but the vote was 4-3, with the 3 dissents in favor of a 25 bp hike. This was a hawkish shift from the previous meeting March 29, when the vote was 6-1. Next meeting is June 21 and it’s going to be another close call. The economy is slowing sharply but inflation remains elevated and so it’s quite possible that one dovish policymaker shifts to the hawkish camp. April current account data will be reported Tuesday.

Turkey reports April current account data Monday. A deficit of -$4.35 bln is expected vs. -$4.48 bln in March. If so, the 12-month total would rise to -$56.0 bln vs. -$54.2 bln in March and would be the highest since August 2012. April retail trade will be reported Tuesday. May central government budget data will be reported Thursday. The twin deficits remain a problem and whether they can be financed depends largely on monetary policy under incoming Governor Erkan. Next policy meeting is June 22 and the bank would have to hike rates aggressively in order to regain market confidence. One major bank is calling for a hike to 25.0% at that meeting but we believe that is unlikely.

Israel reports May trade data Tuesday. May CPI will be reported Thursday, with headline expected to remain steady at 5.0% y/y. If so, it would be stuck at that level for the third straight month and remain well above the 1-3% target range. At the last policy meeting May 22, Bank of Israel hiked rates 25 bp to 4.75% and Deputy Governor Abir said continue tightening “has been the cost of the depreciation of the currency around the political uncertainty, increasing this premium for Israel around the judicial reforms.” Next policy meeting is July 10 and while another hike is possible, much will depend on politics and the shekel.


China reports May new loan and aggregate financing data sometime this week. New loans are expected at CNY1.6 trln vs. CNY719 bln in April, while aggregate financing is expected at CNY1.9 trln vs. CNY1.2 trln in April. PBOC sets its 1-year MLF rate Thursday and is expected to remain steady at 2.75%. However, a handful of analysts look for a 10 bp cut to 2.65%. China also reports May IP, retail sales, fixed asset investment, and property investment Thursday. IP is expected at 3.5% y/y vs. 5.6% in April, sales are expected at 13.7% y/y vs. 18.4% in April, and FAI is expected at 4.4% YTD vs. 4.7% in April, and property investment is expected at -6.6% YTD vs. -6.2% in April.

India reports May CPI and April IP Monday. Headline inflation is expected at 4.37% y/y vs. 4.70% in April, while IP is expected at 1.5% y/y vs. 1.1% in March. If so, headline would be the lowest since September 2021 and well within the 2-6% target range. WPI will be reported Wednesday and is expected at -2.49% y/y vs. -0.92% in April. The RBI left rates unchanged last week but flagged risks of further tightening by keeping its bias towards “removal of accommodation.” Governor Das stressed “Close and continued vigil on the evolving inflation outlook is absolutely necessary, especially as the monsoon outlook and the impact of El Nino remain uncertain.” Das repeated his statement from the last hold that the decision remains a “pause, not a pivot.” The market says otherwise and is pricing in no more hikes and a potential easing cycle over the next three months. May trade data will be reported Thursday.

Taiwan central bank meets Thursday and is expected to keep rates steady at 1.875%. At the last policy meeting March, the bank delivered a hawkish surprise and hiked rates 12.5 bp vs. no change expected. Since then, the economy has slowed further while inflation pressures have fallen. CPI rose 2.02% y/y in May, the lowest since July 2021. While the central bank does not have an explicit inflation target, we believe the tightening cycle has ended. The market is pricing in steady rates over the 12 months, followed by the start of an easing cycle over the subsequent 12 months.

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