EM Preview for the Week of June 26, 2022

June 26, 2022

EM FX was mixed last week despite broad-based dollar weakness against the majors. EM remains vulnerable to rising DM rates, but recent weakness in oil, copper, and other commodity prices are adding to the headwinds. In a sense, this is the inverse of the dollar smile. EM will be hurt if global recession risks rise, but will be hurt by higher DM interest rates if those recession risks ebb. Worst EM performers last week were COP, CLP, PHP, PEN, and BRL.


Mexico reports May trade data Monday. Trade tensions are likely to ratchet up as reports suggest the U.S. is preparing to escalate its complaint that Mexico’s energy polices violate the USMCA. Specifically, USTR Tai set forth in a March letter to Mexico Economy Minister Tatiana Clouthier that listed U.S. concerns about Mexico’s energy policies, including changes in laws to favor state-owned power plants over private producers, violate the USMCA’s provisions.

Brazil reports May central government budget data Wednesday. A primary deficit of -BRL31.1 bln is expected vs. a BRL28.6 bln surplus in April. Consolidated budget data will be reported Thursday and a primary deficit of -BRL25.1 bln is expected vs. a BRL38.9 bln surplus in April. The fiscal numbers are starting to turn as interest payments start to bite. The primary surplus has held up but we expect spending to pick up as the fall elections get closer. Senator Bezerra estimated that the proposal to limit the impact of high fuel prices will cost the government BRL34.8 bln ($6.7 bln) and yet this extra spending will bypass the spending cap rule. June trade data will be reported Friday.

Chile reports May IP and retail sales Thursday. Sales are expected at -6.3% y/y vs. 19.95% in April. May GDP proxy will be reported Friday and is expected at 4.7% y/y vs. 6.9% in April. The economy is likely to continue slowing from aggressive monetary tightening as well as sharply lower copper prices, which have fallen nearly 20% from the early June peak as global recession fears mount. Of note, Codelco recently said that the supply-demand balance for copper is “very favorable” whilst acknowledging “temporary short-term turbulence, but what is important here are the fundamentals.”

Colombia central bank meets Thursday and is expected to hike rates 150 bp to 7.5%. However, several analysts polled by Bloomberg look for smaller 100 or 125 bp moves. CPI rose 9.07% y/y in May, the first deceleration since March 2021 but still well above the 2-4% target range. The swaps market is pricing in 450 bp of tightening over the next 12 months that would see the policy rate peak near 10.50%. One good sign regarding the incoming Petro administration is that former central banker as well as former Finance Minister Jose Antonio Ocampo has joined the economics team.


National Bank of Hungary meets Tuesday and is expected to hike the base rate 50 bp to 6.40%. However, nearly half of the analysts polled by Bloomberg look for a larger 100 bp move. At the last meeting May 31, the bank hiked the base rate 50 bp to 5.90%. Since then, it has also hiked the 1-week deposit rate a total of 80 bp to 7.25%and is expected to hike it 30 bp to 7.55% at its weekly tender Thursday. CPI rose 10.7% y/y in May, the highest since May 2001 and further above the 2-4% target range. The swaps market is pricing in 180 bp of tightening over the next 6 months that would see the base rate peak near 7.70%. We see upside risks as price pressures continue to climb.

Russia reports May real retail sales, IP, and unemployment Wednesday. Sales are expected at -9.6% y/y vs. -9.7% in April, while IP is expected at -3.2% y/y vs. -1.6% in April. The economy continues to suffer from international sanctions but so far has been able to avoid a total collapse. Reports suggest the G-7 plans to announce a ban on imports of new gold from Russia, though this only formalizes what’s already been carried out by the London Bullion Market Association. Reports suggest the G-7 is also looking to place more restrictions on Russian crude oil by focusing on insurance and shipping.

Turkey reports May trade data Thursday. A deficit of -$10.70 bln is expected vs. -$6.11 bln in April. If so, the 12-month total would rise to -$71.1 bln and would be the highest since September 2018. With the twin deficits growing, we believe a balance of payments crisis is unfolding that will eventually force policymakers into an orthodox policy response that include massive rate hikes. Policymakers are still tinkering with regulatory changes to boost the lira. The latest one involves limiting lira loan creation for banks that hold too much foreign exchange. In order to be able to make new loans above the limits, those banks would be forced to sell some of their FX holdings.

Poland reports June CPI Friday. Headline is expected at 15.5% y/y vs. 13.9% in May. If so, it would be the highest since October 1996 and further above the 1.5-3.5% target range. At the last policy meeting June 8, the bank hiked rates 75 bp to 6.0%, as expected. Next meeting is July 7 and another 75 bp hike seems likely. The swaps market is pricing in 125 bp of tightening over the next 12 months that would see the policy rate peak near 7.25%. We see upside risks as price pressures continue to climb.


Korea reports May IP Thursday. IP is expected at 4.0% y/y vs. 3.3% in April. June trade data will be reported Friday. Exports are expected at 4.9% y/y vs. 21.3% in May, while imports are expected at 21.5% y/y vs. 32.0% in May. This would result in a trade deficit of -$3.96 bln ,which would be the largest since January and the third deficit in a row. High energy prices will narrow the current account surplus this year but it should avoid moving into deficit. Despite the Bank of Korea being one of the most aggressive to tighten in emerging Asia, the won has been one of the worst EM performers at -8.5% YTD.

China reports official June PMI readings Thursday. Manufacturing is expected at 50.3 vs. 49.6 in May, while non-manufacturing is expected at 50.1 vs. 47.8 in May. If so, the composite PMI should rise sharply from48.4 in May. Caixin manufacturing PMI will be reported Friday and is expected at 49.4 vs. 48.1 in May. The economy should continue to recover as restrictions are eased, but we’ve already seen some quickly reversed when the virus numbers rise. As a result, the recovery is likely to be uneven and spotty. No wonder the IMF just called on China to accelerate its vaccination program, which it estimates will take a “matter of years” to deliver three doses to the population at the current pace.

Indonesia reports June CPI Friday. Headline is expected at 4.2% y/y vs. 3.55% in May, while core is expected at 2.70% y/y vs. 2.58% in May. If so, headline would be the highest since June 2017 and above the 2-4% target range. Last week, Bank Indonesia delivered a dovish hold. It left rates steady at 3.5% and Governor Warjiyo said that the bank does not need to rush into hiking rates unless it sees fundamental inflationary pressures. He added that the bank forecasts inflation of 4.2% this year, above the 2-4% target “but still very low compared to other countries.” At the May 24 meeting, the bank raised reserve requirements to 9% starting in September vs. 6.5% previously planned. We think this lays the groundwork for liftoff at the next meeting July 21; if not, the rupiah is likely to come under greater pressure.

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