EM FX was mixed last week despite broad dollar strength against the majors. COP, ZAR, and TWD outperformed while PLN, PEN, and THB underperformed. However, EM FX’s surge at the start of the week due to the US-China trade truce gave way to steady losses as the euphoria wore off. Indeed, reports suggest that the U.S. does not have the manpower to negotiate many trade deals and so will instead set tariff rates over the next 2-3 weeks. This ongoing tariff uncertainty is likely to weigh on EM FX this week.
AMERICAS
Mexico reports mid-May CPI data Thursday. Headline is expected at 4.00% y/y vs. 3.90% previously, while core is expected at 3.97% y/y vs. 3.96% previously. If so, headline would be right at the top of the 2-4% target range. Yet Banco de Mexico just cut rates 50 bp for the third straight meeting to 8.5% last week, 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. The bank said trade tensions post “significant downward risks” to the economy but added that inflation risks remain “biased to the upside.” Overall, this was a dovish message as 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%.
EUROPE/MIDDLE EAST/AFRICA
South Africa reports April CPI data Wednesday. Headline is expected to remain steady at 2.7% y/y while core is expected to remain steady at 3.1% y/y. If so, headline would remain below the 3-6% target range for the second straight month. Next South Africa Reserve Bank meeting is May 29 and if inflation remains low, a 25 bp cut seems likely. At the last policy meeting March 20, the bank kept rates steady at 7.5%. Governor Kganyago said “The world economy is experiencing extreme levels of uncertainty. Trade tensions have escalated, and longstanding geopolitical relationships are shifting abruptly. In these circumstances, the global economic outlook is unpredictable. Globally we do not know where policy will end up.” Its model showed the policy rate at 7.25% for end-2025 and 7.21% for end-2026, which is slightly higher than market pricing for the policy rate bottoming near 7.0% over the next six months.
ASIA
China reports April real sector data Monday. Retail sales are expected to fall a tick to 5.8% y/y, IP is expected at 5.7% y/y vs. 7.7% in March, and fixed asset investment is expected to remain steady at 4.2% YTD. Commercial banks set their Loan Prime Rates Tuesday and expected to cut the 1- and 5-year rates 10 bp to 3.0% and 3.5%, respectively. These cuts would simply reflect the recent 10 bp cut in the 7-day reverse repo rate. With deflation risks persisting, we expect further stimulus measures in the coming weeks.
Bank Indonesia meets Wednesday and is expected to cut rates 25 bp to 5.5%. However, 6 of the 22 analysts polled by Bloomberg look for steady rates. At the last meeting April 23, the bank kept rates steady at 5.75% for the third straight meeting. Governor Warjiyo said “We will continue to monitor the scope for interest rate cuts. Once rupiah stability is achieved, room for further cuts will become more open, and that will be the time.” Since that meeting, IDR has gained nearly 3% and should give BI confidence to cut this week. Bloomberg consensus sees a 25 bp cut in Q2 followed by another 25 bp cut in Q4.
Malaysia reports April CPI data Thursday. Headline is expected to remain steady at 1.4% y/y. 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 would release 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.
Singapore reports April CPI data Friday. Headline is expected to remain steady at 0.9% y/y while core is expected to remain steady at 0.5% y/y. 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.”
