EM FX was mostly firmer last week due to broad dollar weakness. BRL, KRW, and MXN outperformed while PEN, PLN, and TRY underperformed. The dollar got a bit of a reprieve Friday after the better than expected jobs data, but we expect weakness to resume this week as inflation data come into focus. For now, the U.S. economy remains relatively resilient but higher inflation readings due to tariffs may start to bite. We also see risks of negative trade-related headlines this week that could further weigh on the greenback. While the outlook for EM remains cloudy due to slowing global growth, EM FX is likely to continue benefiting from ongoing dollar weakness.
AMERICAS
Mexico reports May CPI data Monday. Headline is expected at 4.38% y/y vs. 3.93% in April, while core is expected at 4.03% y/y vs. 3.93% in April. If so, headline would be the highest since November and back above the 2-4% target range. 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. Next policy meeting is June 26 and another 50 bp cut to 8.0% seems likely. Looking ahead, the swaps market is pricing in nearly 125 bp of total easing over the next 12 months that would see the policy rate bottom near 7.25%.
Colombia reports May CPI data Monday. Headline is expected at 5.12% y/y vs. 5.16% in April, while core is expected at 5.27% y/y vs. 5.29% in April. If so, headline would resume decelerating but would remain well above the 2-4% target range. 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 75 bp of total easing over the next 12 months that would see the policy rate bottom near 8.5%.
Brazil reports May IPCA inflation Tuesday. Headline is expected at 5.40% y/y vs. 5.53% in April. If so, headline would fall for the first time since January but would remain well above the 1.5-4.5% target range. At the last meeting May 7, the central bank hiked rates 50 bp to 14.75% and noted that the easing cycle in in an “advanced stage” and that calibration of monetary policy depends on how inflation behaves. The bank warned that risks to the inflation outlook in both directions are higher than usual. As such, “This scenario prescribes a significantly contractionary monetary policy for a prolonged period to assure the convergence of inflation to the target.” Next COPOM meeting is June 18 and a 25 bp hike to 15.0% is expected. After that , the swaps market is pricing in no more hikes in this cycle.
Peru central bank meets Thursday and is expected to keep rates steady at 4.5%. At the last meeting May 8, the bank delivered a dovish surprise and cut rates 25 bp to 4.5% vs. no change expected. It said expects both headline and core inflation to remain near 2% in the coming months, which would be right at the middle of the 1-3% target band. The bank noted that rates are approaching neutral levels and warned of downside risks related to the global trade wars. As such, we see slight risks of a dovish surprise this week. Of note, Bloomberg consensus sees steady rates through year-end.
EUROPE/MIDDLE EAST/AFRICA
Hungary reports May CPI data Wednesday. Headline is expected to rise a tick to 4.3% y/y. If so, it would rise for the first time since February and would move further above the 2-4% target range. Central bank minutes will also be released Wednesday. At that meeting May 27, the bank kept rates steady at 6.5% and said the decision was in line with its “stability oriented” approach. The bank added that “Maintaining tight monetary conditions is warranted” and that “A careful and patient approach to monetary policy remains necessary due to risks to the inflation environment as well as trade policy and geopolitical tensions.” Governor Varga said that rates could remain at the current level for “an extended period.” Despite the hawkish guidance, the swaps market is pricing in 50 bp of easing over the next 12 months.
ASIA
China reports May money and loan data sometime this week. CPI, PPI, and trade data will be reported Monday. CPI is expected at -0.2% y/y vs. -0.1% in April while PPI is expected at -3.2% y/y vs. -2.7% in April. Overall, China’s economy is struggling to escape a deflationary spiral, in large part because consumption spending is too weak. China's consumption-to-GDP ratio is very low at around 40%, which is due to a combination high household savings, low household income levels, and high levels of household debt. Expect further stimulus measures in the coming weeks.
India reports May CPI data Thursday. Headline is expected at 3.00% y/y vs. 3.16% in April. If so, headline would be the lowest since April 2019 and further towards the bottom of the 2-6% target range. Last week, the Reserve Bank of India unexpectedly delivered a jumbo cut and signaled a pause to the easing cycle. The bank cut rates 50 bp to 5.50% vs. 25 bp expected in a 5-1 vote split. The dissenter voted for a 25 bp cut. The RBI noted that “inflation has softened significantly over the last six months” and argued for “frontloading the rate cuts to support growth.” Importantly, the RBI decided to change its stance from accommodative to neutral due to “very limited space to support growth.” This suggests the RBI is done easing for now. However, the swaps market is pricing in 25 bp of further easing over the next 12 months that would see the policy rate bottom near 5.25%.
