EM FX was mixed even though the dollar was broadly weaker against the majors last week. The CEE currencies outperformed while PHP, ZAR, and CLP underperformed. The dollar gained Friday at the expense of EM FX and other risk assets as Middle East tensions ratcheted up. Some haven bid may be seen early this week, but we would look to fade that dollar strength as the underlying downtrend remains intact. The labor market is starting to crack and we look for a dovish hold from the Fed this week. As a result, the EM FX rally should resume.
AMERICAS
Chile central bank meets Tuesday and is expected to keep rates steady at 5.0%. It then releases its quarterly inflation report Wednesday. At the last meeting April 29, the central bank kept rates steady at 5.0% and said “Changes in global trade policy have deteriorated the prospects for global growth, while increasing uncertainty about its future evolution. The magnitude and timing of these effects on the local economy are still uncertain.” The swaps market is pricing in 75 bp of easing over the next 12 months that would see the policy rate bottom near 4.25%.
Brazil COPOM meets Wednesday and is expected to keep rates steady at 14.75%. However, the market is split. Nearly half the analysts polled by Bloomberg look for a 25 bp hike, while the CDI market sees about 50-50 odds of a hike. At the last meeting May 7, the central bank hiked rates 50 bp to 14.75% and noted that the easing cycle in in an “advanced stage” and that calibration of monetary policy depends on how inflation behaves. The bank warned that risks to the inflation outlook in both directions are higher than usual. As such, “This scenario prescribes a significantly contractionary monetary policy for a prolonged period to assure the convergence of inflation to the target.”
EUROPE/MIDDLE EAST/AFRICA
Israel reports May CPI data Monday. Headline is expected to fall a tick to 3.5%. At the last meeting May 25, Bank of Israel kept rates steady at 4.5% and warned that “Forecasters project that the convergence of inflation to the target range will be later than their assessments prior to the publication of the April CPI.” At the April meeting, bank researchers saw the policy rate at 4.0% in 12 months vs. 4.0-4.25% at the January meeting. Updates to the expected rate path will come at the next meeting July 7. However, the ongoing hostilities with Iran add more uncertainty to the mix and so we believe the bank will take a cautious approach to easing. The swaps market is pricing in 50 bp of total easing over the next 12 months, but this seems too optimistic.
South Africa reports May CPI data Wednesday. Headline is expected to remain steady at 2.8% y/y, while core is expected to pick up a tick to 3.1% y/y. At the last meeting May 29, SARB cut rates 25 bp to 7.25% by a 5-1, with the dissent in favor of a larger 50 bp move. Governor Kganyago said “We have revised down our inflation forecasts” after National Treasury scrapped plans to raise the VAT. He added that “A stronger exchange rate assumption and lower world oil prices” were also factors. Note that the bank has signaled that it may soon change its inflation target to 3% from the current 3-6% band. Under a 3% objective, the SARB’s model shows the policy rate falling to 7% by end-2025 rather than staying at 7.25% in the baseline forecast. This is in line with swaps market pricing.
Turkey central bank meets Thursday and is expected to keep rates steady at 46.0%. At the last meeting April 17, the central bank hiked rates 350 bp to 46.0% and said that “Monetary policy stance will be tightened in case a significant and persistent deterioration in inflation is foreseen.” Since then, inflation has fallen further and so we see a dovish hold this week that sets up eventual easing. The swaps market is pricing in 10 percentage points of total easing over the next six months.
ASIA
China reports May real sector data Monday. Retail sales are expected to fall two ticks to 4.9% y/y, IP is expected to fall a tick to 6.0% y/y, and fixed asset investment is expected to remain steady at 4.0% YTD. The economy is holding up relatively well despite the trade war but deflation risks remain and so we look for more easing measures in the coming weeks.
Bank Indonesia meets Wednesday and is expected to keep rates steady at 5.5%. However, a handful of analysts polled by Bloomberg look for a 25 bp cut to 5.25%. At the last meeting May 21, Bank Indonesia cut rates 25 bp to 5.5%. It lowered its 2025 GDP growth forecast 0.1 ppt to 4.6-5.4% and expects inflation to remain low and stay within its 1.5-3.5% target range in both 2025 and 2026. IDR strength will be key in giving the bank confidence to ease further. Of note, Bloomberg consensus does not see the next 25 bp cut until 2026.
Philippine central bank meets Thursday and is expected to cut rates 25 bp to 5.25%. At the last meeting April 10, the central bank cut rates 25 bp to 5.5% and Governor Remolona said “Like the rest of the world, we’re looking at slower growth, but unlike the rest of the world, we’re looking at lower inflation. On balance, the more manageable inflation outlook and the risks to growth allow for a shift toward a more accommodative monetary policy stance.” He added that “The BSP will continue to take a measured approach in deciding on further monetary easing.” The swaps market is pricing in 75 bp of total easing over the next 12 months that would see the policy rate bottom near 4.75%.
Taiwan central bank meets Thursday and is expected to keep rates steady at 2.0%. At the last meeting March 20, the central bank kept rates steady at 2.0% and sounded upbeat about the economic outlook. Governor Yang said Taiwan has no conditions for easing. Since then, tariffs have roiled global markets while TWD has strengthened around 10%, which both put downside risks on Taiwan’s economic outlook. As a result, the swaps market is starting to price in an easing cycle over the next 12 months.
