EM FX was mixed last week, reflecting a mixed performance for the dollar overall. KRW, PLN, and HUF outperformed while BRL, ZAR, and MXN underperformed. For Q2 as a whole, CLP, ZAR, and MYR outperformed while BRL, MXN, and COP underperformed. We believe the same drivers that hurt EM FX in Q2 (hawkish Fed, sluggish China, rising market volatility) are likely to carry over into Q3.
AMERICAS
Peru reports June CPI Monday. Headline is expected at 2.3% y/y vs. 2.0% in May. If so, it would be the first acceleration since February but would remain well within the 1-3% target range. At the last meeting June 13, the central bank surprised markets by holding rates steady at 5.75% vs. an expected 25 bp cut. Even though inflation had fallen to the 2% target in May, the bank noted that “Inflation excluding food and energy is showing some persistence associated with the services industry.” Next meeting is July 11 and if inflation pressures resume falling, a 25 bp cut to 5.5% seems likely. Bloomberg consensus sees a year-end policy rate of 5.0%.
Colombia central bank releases its minutes Thursday. At last week’s meeting, the bank cut rates 50 bp to 11.25%, as expected. It was a split 4-2 vote, with the two dissents in favor of a larger 75 bp cut and one absent that did not vote. At the previous meeting April 30, the vote was a 5-2 split, with the two dissents in favor of 75 and 100 bp cuts. Governor Villar said rate cuts would continue but stressed that the bank needs to see a faster drop in inflation in order to cut at a faster rate. Villar added that peso weakness doesn’t merit FX intervention. The market is pricing in around 300 bp of easing over the next 12 months that would see the policy rate bottom near 8.25%.
EUROPE/MIDDLE EAST/AFRICA
Turkey reports June CPI Wednesday. Headline is expected at 72.60% y/y vs. 75.45% in May, while core is expected at 73.13% y/y vs. 74.98% in May. If so, this would be the first deceleration in headline since October. That said, much of the expected improvement will be due to high base effects. The risk is that the market is underestimating how sticky inflation may be in the coming months. Indeed, a central bank survey of households saw 71.5% inflation expected a year from now vs. 31.8% seen in a survey of market participants. The central bank itself sees 38% inflation by the end of this year and 14% by the end of next year. The market is pricing in 325 bp of easing over the next three months followed by another 575 bp of easing over the subsequent three months. This seems too aggressive.
National Bank of Poland meets Wednesday and is expected to keep rates steady at 5.75%. The bank will likely reiterate that “the current level of the NBP interest rates is conducive to meeting the NBP inflation target in the medium term.” Following the June meeting, Governor Glapinski said the likelihood of rate cuts by the end of this year is “nil”, adding “my comments today are hawkish.” There is no reason to expect the message to change this week. The market is pricing in 25 bp of easing over the next six months, followed by another 25 bp over the subsequent six months. Governor Glapinski holds a press conference Thursday. Minutes to the June 5 meeting will be released Friday.
ASIA
Korea reports June trade data Monday. Exports are expected at 4.4% y/y vs. 11.5% in May, while imports are expected at -4.7% y/y vs. -2.0% in May. June CPI will be reported Tuesday. Headline is expected to fall a tick to 2.6% y/y, while core is expected to remain steady at 2.2% y/y. If so, headline would be the lowest since July 2023 but still above the 2% target. At the last meeting May 23, Bank of Korea left rates steady at 3.5% and Governor Rhee noted that “Uncertainties over the timing of a rate cut have grown. If there is confidence that inflation stabilizes, the task of normalizing the rate level would need to be started.” The market now sees steady rates over the next three months, followed by 25 bp of easing over the subsequent three months and then 25 bp of further easing over the subsequent six months. May current account data will be reported Friday.
Caixin reports June manufacturing PMI Monday. Headline is expected at 51.5 vs. 51.7 in May. Services and composite PMIs will be reported Wednesday, with services expected at 53.4 vs. 54.0 in May. Over the weekend, soft official PMIs were reported. Manufacturing remained steady at 49.5 but non-manufacturing fell to 50.5 vs. 51.1 in May. As a result, the composite PMI fell half a point to 50.5, the lowest since December and nearing the 50 boom/bust level. We believe the Caixin PMIs have been overstating growth in China and that the official readings are closer to the mark.
Indonesia reports June CPI Monday. Headline is expected at 2.70% y/y vs. 2.84% in May, while core is expected at 1.94% y/y vs. 1.93% in May. If so, headline would be the lowest since January and still in the bottom half of the 2-4% target range. At the last meeting June 20, Bank Indonesia left rates steady at 6.25% and said current policy is in line with its inflation goals for this year and next. The bank said it sees room for a rate cut if global and fiscal concerns ease. It remained focused on the exchange rate, noting that it sees the rupiah strengthening going forward towards its fundamental value below 16,000 per USD. Next meeting is July 17 and rates are likely to be kept steady then. Bloomberg consensus sees the first cut coming in Q4. We concur.
Philippines reports June CPI Friday. Headline is expected to remain steady at 3.9% y/y. if so, it would remain right at the top of the 2-4% target range. The central bank just delivered a dovish hold last week, as Governor Remolona said, “The balance of risks to the inflation outlook has shifted to the downside for 2024 and 2025 due largely to the impact of lower import tariffs on rice.” He added that this makes a rate cut at the next meeting August 15 somewhat more likely than before and that a total 50 bp of easing this year was possible. Of note, the market is pricing in 75-100 bp of easing in H2. This seems too aggressive when the peso is trading near all-time lows.
Thailand reports June CPI Friday. Headline is expected at 1.20% y/y vs. 1.54% in May. At the last meeting June 12, Bank of Thailand left rates steady at 2.5%. It was a less dovish hold compared to previous meetings, as only one MPC member dissented in favor of a 25 bp cut vs. two dissents at the last two meetings in April and February. Furthermore, the statement scrapped the phrase that “uncertainties on the Thai economy remain high.” BOT kept its growth and inflation forecasts largely unchanged. The swaps market is pricing in steady rates over the next six months followed by 25 bp of easing over the subsequent six months.
Taiwan reports June CPI Friday. Headline is expected at 2.30% y/y vs. 2.24% in May, while core is expected at 1.90% y/y vs. 1.84% in May. While the central bank does not have an explicit inflation target, Taiwan rates have likely peaked as price pressures ebb. However, the swaps market sees 25 bp of tightening over the next 12 months. At the last meeting June 13, the central bank left rates steady at 2.0%. However, the bank tightened liquidity by raising commercial bank reserve ratios 25 bp and so there appears to be a tightening bias in place. Next policy meeting is September 19, and we see steady rates then.
