EM FX was mixed last week, taking advantage of an overall mixed performance for the dollar. ZAR, MXN, and PLN outperformed while BRL, CZK, and CLP underperformed. Data last week continued to underscore the relative outperformance of the U.S. economy, while central bank decisions continued to underscore the resulting monetary policy divergence. Both continue to favor the dollar and so we expect the rally to continue and so EM FX is likely to remain under pressure.
AMERICAS
Mexico reports mid-June CPI Monday. Headline is expected at 4.73% y/y vs. 4.59% previously, while core is expected at 4.18% y/y vs. 4.11% previously. If so, headline would move further above the 2-4% target range. Banco de Mexico meets Thursday and is expected to keep rates steady at 11.0%. At the last meeting May 9, the bank kept rates steady after starting the easing cycle at the March 21 meeting with a 25 bp cut. Recent weakness in MXN is an upside risk to inflation and will keep the bank cautious. The swaps curve has adjusted higher since the May meeting and is pricing in only 75 bp of easing over the next 12 months vs. 125 bp at the start of May. May trade data will also be reported Thursday.
Brazil central bank minutes will be released Tuesday. At last week’s meeting, the bank voted unanimously to “interrupt” the easing cycle and kept rates steady at 10.5%. It gave no forward guidance as it noted “Monetary policy should continue being contractionary for sufficient time at a level that consolidates both the disinflation process and the anchoring of expectations around the targets.” Minutes may provide clues about the start of the tightening cycle, which the market believes could be over the next three months. Mid-June IPCA inflation will be reported Wednesday and is expected at 4.11% y/y vs. 3.70% in mid-May. If so, this would be the first acceleration since mid-February. BCB releases its quarterly inflation report Thursday. Central government budget data for May will be reported Wednesday and consolidated budget data will be reported Friday.
Colombia central bank meets Friday and is expected to cut rates 50 bp to 11.25%. At the last meeting April 30, the bank cut rates 50 bp for the second straight time after starting the easing cycle with two straight 25 bp cuts. However, it was a dovish 5-2 vote as the dissents were in favor of larger 75 and 100 bp cuts. Since then, the recovery in economic activity has been sluggish but Governor Villar warned of the risks associated with a faster easing cycle. The market is pricing in 300 bp of total easing over the next 12 months.
EUROPE/MIDDLE EAST/AFRICA
Czech National Bank meets Thursday and is expected to cut rates 25 bp to 5.75%. However, a handful of analysts polled by Bloomberg see a larger 50 bp cut. Governor Michl recently said, “the debate on June 27 will be whether to repeat a 50 bp cut or make a 25 bp reduction.” Michl added “even if we cut by 50 bp, we will still send a clear message that rates will be higher for longer.” At the last meeting May 2, all seven bank board members voted to cut rates 50 bp for the third straight time after starting the easing cycle at the December meeting with a 25 bp cut. The market is pricing in 75 bp of total easing over the next 12 months.
Turkey central bank meets Thursday and is expected to keep rates steady at 50.0%. At the last meeting May 23, the bank kept rates steady for the second straight meeting after delivering a surprise 500 bp hike at the March 21 meeting. With core inflation seemingly topping out, the risk is the central bank delivers a dovish hold. The swaps market is pricing in steady rates over the next three months followed by 500 bp of easing over the subsequent three months followed by another 1450 bp of easing over the subsequent six months. The risk is that the market is underestimating how sticky inflation may be.
Poland reports June CPI Friday. Headline is expected to pick up a tick to 2.6% y/y. if so, it would be the third straight month of acceleration but would remain well within the 1.5-3.5% target range. At the last meeting June 5, the National Bank of Poland kept rates steady at 5.75% and continued to warn that inflation will spike above 5% in H2. Governor Glapinski said a rate cut was not discussed at the meeting, while MPC member Dabrowski said the bank may cut rates in early 2025. Next meeting is July 3, and no change is expected then. Of note, the swaps market is pricing in a 25 bp cut before year-end.
ASIA
Singapore reports May CPI Monday. Headline is expected at 3.1% y/y vs. 2.7% in April, while core is expected to remain steady at 3.1% y/y. If so, headline would accelerate for the first time since February. While the MAS does not have an explicit inflation target, persistent price pressures should keep it on hold at the next meeting in late July. At the last meeting April 12, MAS kept policy unchanged and noted that “The Singapore economy is expected to strengthen over 2024, with growth becoming more broad-based. The slightly negative output gap is projected to narrow further in H2 2024, even as underlying inflationary pressures gradually dissipate. MAS Core Inflation is likely to remain elevated in the earlier part of the year but should stay on its broadly moderating path and step down in Q4, before falling further into 2025.” We believe the MAS is being a bit too optimistic about the growth outlook and is likely to ease policy in H2. May IP will be reported Wednesday and is expected at 1.4% y/y vs. -1.6% in April.
Malaysia reports May CPI Tuesday. Headline is expected to rise a tick to 1.9% y/y. If so, it would be the first acceleration since February. While Bank Negara does not have an explicit inflation target, relatively low price pressures should allow it to keep rates steady for now, with an eye towards easing later in H2 if the ringgit remains stable. At the last meeting May 9, Bank Negara kept rates steady at 3.0% but signaled that it is unlikely to shift to looser policy settings anytime soon. First, it noted that “the latest indicators point towards higher economic activity in the first quarter of 2024.” Second, it forecast headline and core inflation to pick up over 2024 and average between 2.0-3.5% and 2.0-3.0%, respectively. Third, it warned “the ringgit currently does not reflect Malaysia's economic fundamentals and growth prospects.” Next meeting is July 11, and no change is expected then. The swaps market continues to price in steady rates over the next three years.
Philippines central bank meets Thursday and is expected to keep rates steady at 6.5%. At the last meeting May 16, the bank kept rates steady but set the table for the easing cycle to begin. Governor Remolona said “we are actually somewhat less hawkish than before, which means we could ease” rates in the third or fourth quarter this year. He added that the bank could cut rates 25 bp in August and by up to 50 bp total in H2. However, we believe much will depend on the peso, which is trading at the weakest since late 2022 and nearing the all-time low near 59.329 from October 2022.
