EM Preview for the Week of June 19, 2022

June 19, 2022

EM FX was broadly weaker last week as the dollar mounted a strong and broad-based recovery. RUB, PEN, and COP were the only EM currencies to notch gains last week, while CLP, BRL, and MXN were the worse performers. With Fed officials likely to remain hawkish this week, we believe U.S. yields and the dollar will continue to rise at the expense of risk assets such as EM FX and XBT.


Brazil COPOM minutes will be released Tuesday. It hiked 50 bp to 13.25% last week and signaled it would be appropriate to tighten policy “significantly into even more restrictive territory” and added that “For its next meeting, the Committee foresees a new adjustment, of the same or lower magnitude.” The swaps market is pricing in 50 bp of further tightening over the next 6 months that would see the policy rate peak near 13.75% vs. 13.50% last week. Mid-June IPCA inflation will be reported Friday. Headline is expected at 12.01% y/y vs. 12.20% in mid-May. Deceleration would be welcome but it would still be well above the 2-5% target range. There are also upside risks ahead after Petrobras hiked gasoline prices at its refineries by 5.2% and hiked diesel prices by 14%, ignoring warnings from President Bolsonaro.

Mexico reports mid-June CPI Thursday. Headline is expected at 7.70% y/y vs. 7.58% in mid-May. If so, inflation would remain near the cycle highs and well above the 2-4% target range. Banco de Mexico meets later Thursday and is expected to hike rates 75 bp to 7.75%. At the last meeting May, 12, the bank hiked rates 50 bp to 7.0%, as expected. However, it hinted at larger hikes ahead as it noted “Given the growing complexity in the environment for inflation and its expectations, taking more forceful measures to attain the inflation target may be considered.” The vote was 4-1, with Deputy Governor Espinosa dissenting in favor of a 75 bp hike. Since then, Deputy Governor Heath has also signaled support for a 75 bp move. The swaps market is pricing in 300 bp of tightening over the next 12 months that would see the policy rate peak near 10.0% vs. 9.5% at the start of this month.


Poland reports May IP and PPI Tuesday. IP is expected at 16.5% y/y vs. 13.0% in April, while PPI is expected at 24.7% y/y vs. 23.3% in April. Construction output and real retail sales will be reported Wednesday. Construction is expected at 8.0 y/y vs. 9.3% in April, while sales are expected at 8.9% y/y vs. 19.0% in April. Activity remains strong while inflation remains high. The central bank just hiked rates 75 bp to 6.0% this month and signaled further hikes. Next policy meeting is July 7 and another 75 bp hike to 6.75% seems likely. The swaps market is pricing in 150 bp of tightening over the next 12 months that would see the policy rate peak near 7.5%.

South Africa reports May CPI Wednesday. Headline is expected at 6.1% y/y vs. 5.9% in April, while core is expected at 4.1% y/y vs. 3.9% in April. If so, headline would be the highest since March 2017 and above the 3-6% target range. At the last meeting May 19, SARB hiked rates 50 bp to 4.75% by a 4-1 vote, with the dissent in favor of a smaller 25 bp move. Its models were updated to show a steeper expected rate path, with the policy rate seen at 5.3% by year-end vs. 5.06% in March and then seen at 6.74% by end-2024 vs. 6.68% in March. Compare this to the swaps market, which is pricing in a year-end rate near 6.25% and a peak policy rate near 8.25% over the next 36 months. Next policy meeting is July 21 and another hike then is likely.

Czech National Bank meets Wednesday and is expected to hike rates 100 bp to 6.75%. However, the market is split as a couple of analysts look for a 75 bp hike, an equal number of analysts see either a 100 or 125 bp hike, and one sees a 150 bp hike. The swaps market is pricing in 100 bp of tightening over the next 6 months that would see the policy rate peak near 6.75%. However, we see upside risks as price pressures remain strong.

Turkey central bank meets Thursday and is expected to keep rates steady at 14.0%. Recent comments from President Erdogan suggest he is nowhere near allowing the bank to tighten policy. Headline inflation came in at 73.50% y/y in May, the highest since October 1998, and PPI suggests no turnaround in sight. Turkey remains an outlier within EM, as rising inflation has led virtually every major EM central bank to tightening aggressively. We believe a balance of payments crisis is unfolding that will eventually force policymakers into an orthodox policy response that include massive rate hikes.


Taiwan reports May export orders Monday. Orders are expected at 1.1% y/y vs. -5.5% in April. While a recovery would be welcome orders are clearly in a slowing trend as regional activity was impacted by the lockdowns in China. As exports are also likely to continue weakening over the next six months. IP will be reported Thursday and is expected at 4.5% y/y vs. 7.33% in April. Korea reports trade data for the first 20 days of June Tuesday and will be watched closely for signs of weakness as well.

Singapore reports May CPI Thursday. Headline is expected to pick up a tick to 5.5% y/y while core is expected to pick up four ticks to 3.7% y/y. If so, headline would be the highest since December 2011. While the MAS does not have an explicit inflation target, rising price pressures will likely lead to another round of tightening at the next policy meeting in October. IP will be reported Friday and is expected at 5.5% y/y vs. 6.2% in April. The economy has held up fairly well in recent months, with May trade data last week coming in stronger than expected.

Philippines central bank meets Thursday and is expected to hike rates 25 bp to 2.5%. However, a third of the analysts polled by Bloomberg look for a larger 50 bp hike. The bank started the tightening cycle at its last meeting May 19 and Governor Diokno said then that “The pace and timing of further monetary policy actions by the BSP shall be guided by data outcomes.” Headline inflation rose 5.4% y/y in May, the highest since November 2018 and further above the 2-4% target range. As such, we see risks of a hawkish surprise this week. The swaps market sees 175-200 bp tightening over the next 12 month, followed by another 100 bp of tightening over subsequent 24 months.

Bank Indonesia meets Thursday and is expected to keep rates steady at 3.5%. However, nearly a quarter of the analysts polled by Bloomberg see liftoff with a 25 bp hike to 3.75%. At the last meeting May 24, the bank kept rates steady but raised reserve requirements to 9% starting in September vs. 6.5% previously planned. Governor Warjiyo said the move would remove IDR110 trln ($7.5 bln) of liquidity from the banking system and comes on top of the planned IDR200 trln rupiah reduction from the steps announced back in January. Headline inflation rose 3.55% y/y in May, the highest since December 2017 and nearing the top of the 2-4% target range. We think this lays the groundwork for liftoff this week. If not, then the next meeting July 21.

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