EM FX was mixed last week despite the dollar’s broad gains against the majors. ARS, COP, and PEN outperformed while PHP, MXN, and THB underperformed. EM FX should remain under pressure this week as risk off impulses pick up even further, but we believe the underlying dollar bear trend will eventually reassert itself on weaker U.S. data that calls the Fed’s hawkish hold into question.
AMERICAS
Brazil central bank minutes will be released Tuesday. At last week’s meeting, the bank unexpectedly hiked rates 25 bp to 15.0% but signaled that the tightening cycle has likely ended. The swaps market sees nearly 33% odds of one more 25 bp hike over the next six months. It said “If the expected scenario materializes, the Committee foresees an interruption of the rate hiking cycle to examine its yet-to-be-seen cumulative impacts.” The bank said it will “evaluate whether the current interest rate level, assuming it’s stable for a very prolonged period, will be enough to ensure the convergence of inflation to the target.” It releases its quarterly monetary policy report Thursday. Brazil also reports mid-June IPCA inflation data Thursday. Headline is expected at 5.31% y/y vs. 5.40% in mid-May. If so, it would be the second straight month of deceleration but would remain above the 1.5-4.5% target range.
Mexico reports mid-June CPI data Tuesday. Headline is expected at 4.50% y/y vs. 4.62% previously, while core is expected to remain steady at 4.15% y/y. If s, headline would fall for the first time since April but would remain above the 2-4% target range. Banco de Mexico meets Thursday and is expected to cut rates 50 bp to 8.0%. At the last meeting May 15, Banco de Mexico cut rates 50 bp for the third straight meeting to 8.5% and added that “The Board estimates that looking ahead it could continue calibrating the monetary policy stance and consider adjusting it in similar magnitudes.” The decision was unanimous and so the bank seems determined to continue cutting rates despite upside risks to inflation. The swaps market is pricing in 100 bp of total easing over the next 12 months that would see the policy rate bottom near 7.5%.
Colombia central bank meets Friday and is expected to keep rates steady at 9.25%. However, about a fifth of the analysts polled by Bloomberg look for a 25 bp cut to 9.0%. At the last meeting April 30, the central bank delivered a dovish surprise and cut rates 25 bp to 9.25% vs. no change expected and said that the cut “maintains a cautious monetary policy stance, while continuing to support the recovery of economic activity without jeopardizing the convergence of inflation to the target.” Next meeting is June 27 and another cut is possible if disinflation continues. However, the exchange rate may be a bigger factor as markets factor in greater political uncertainty after the weekend shooting of presidential candidate Uribe. Looking ahead, the swaps market is pricing in 50 bp of total easing over the next 12 months that would see the policy rate bottom near 8.75%.
EUROPE/MIDDLE EAST/AFRICA
National Bank of Hungary meets Tuesday and is expected to keep rates steady at 6.5%. At the last May 27 meeting, the bank decided unanimously to leave the base rate unchanged at 6.5%, marking the 8th consecutive hold since September 2024. The bank also showed no signs of departing from its hold stance. The bank reiterated that “maintaining tight monetary conditions is warranted” while Governor Varga warned that rates could remain at the current level for a “an extended period.” Nevertheless, the swaps market continues to price in 50 bp of easing over the next six months.
Czech National Bank meets Wednesday and is expected to keep rates steady at 3.5%. At the last meeting May 7, the central bank cut rates 25 bp to 3.5%. However, it was a hawkish cut as Governor Michl said “We don’t have agreement for now whether this was the last cut or not. What we do agree on is that the room for lowering rates further is limited, and that further cuts are preconditioned by a decline in inflationary risks in the domestic economy.” More recently Michl said “The base repo rate currently is at 3.5%, and I expect it will remain at this level for some time.” The swaps market has trimmed rate cut bets over the next 12 months from 50 bp to 25 bp.
ASIA
Singapore reports May CPI data Monday. Headline is expected to fall a tick to 0.8% y/y, while core is expected to fall a tick to 0.6% y/y. If so, headline would be the lowest since February 2021. While the Monetary Authority of Singapore does not have an explicit inflation target, low price pressures should allow it to easy policy again this year if the economy slows too much. At the last meeting April 14, the MAS loosened policy for the second straight quarterly meeting by reducing “slightly” the slope of its S$NEER trading band whilst keeping the width and midpoint unchanged. It noted that “There are downside risks to Singapore’s economic outlook stemming from episodes of financial market volatility and a sharper-than-expected fall in final demand abroad. A more abrupt or persistent weakening in global trade will have significant ramifications on Singapore’s trade-related sectors, and in turn, the broader economy.” Next meeting is July and we cannot rule out further loosening then.
Malaysia reports May CPI data Tuesday. Headline is expected to remain steady at 1.4% y/y. if so, it would remain at the lowest since February 2021. While Bank Negara does not have an explicit inflation target, low price pressures should allow it to easy policy this year if the economy slows too much. At the last meeting May 8, the bank kept rates steady at 3.0% but cut reserve requirements to 2% vs. 1% previously, which released around MYR19 bln of liquidity into the system. The bank noted that “the monetary policy stance is consistent with the current assessment of inflation and growth prospects. Recognizing that there are downside risks in the economic environment, the MPC remains vigilant to ongoing developments to inform the assessment on the domestic inflation and growth outlook.” The swaps market is pricing in 50 bp of easing over the next 12 months that would see the policy rate bottom near 2.5%.
Bank of Thailand meets Wednesday and is expected to keep rates steady at 1.75%. However, about a third of the analysts polled by Bloomberg look for a 25 bp cut to 1.5%. At the last meeting April 30, Bank of Thailand cut rates 25 bp to 1.75% and said “The US trade policies and potential retaliations from major economies will cause significant changes in the global economic, financial, and trade landscape. The Thai economy is projected to expand at a slower pace than anticipated, with more downside risks due to uncertainty in major economies’ trade policies and a decline in the number of tourists.” Assistant Governor Sakkapop added “Monetary policy needs to be more accommodative. We have shifted our policy stance to easing.” Given this dovish guidance, the swaps market is pricing in 50 bp of easing over the next 12 months that would see the policy rate bottom near 1.25%.
