EM FX was mixed last week despite broad dollar losses against the majors. KRW, ZAR, and MYR outperformed while TRY, PEN, and TWD underperformed. The dollar continues to experience a perfect storm of negative drivers: growing fiscal concerns, unpredictable tariff policies, and weaker U.S. data. Those drivers are likely to carry over into this week. However, the backdrop for EM remains difficult as global growth will suffer from the intensifying trade war.
AMERICAS
Brazil reports mid-May IPCA inflation Tuesday. Headline is expected at 5.50% y/y vs. 5.49% in mid-April. If so, inflation would remain a full percentage point above the top of 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.” The swaps market is pricing in one more 25 bp hike over the next three months that would see the policy rate top out near 15.0%.
Banco de Mexico releases its quarterly inflation report Wednesday. It then releases its minutes Thursday. At that May 15 meeting, the bank 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. Since then, mid-May inflation came in higher than expected at 4.22% y/y. 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
Bank of Israel meets Monday and is expected to keep rates steady at 4.5%. At the last meeting April 7, Bank of Israel kept rates steady at 4.5% and Governor Yaron signaled caution ahead by noting “Before tariffs, inflation began to moderate, and we were in the right process of reducing excess demand. Right now, there could definitely be scenarios where we get off this path.” The bank cut its 2025 growth forecast by half a percentage point to 3.5% and sees the policy rate at 4.0% in 12 months vs. 4.0-4.25% at the January meeting. Since then, April inflation accelerated to 3.6% y/y, the highest since January. However, the swaps market is pricing in the start of an easing cycle over the next six months along with 50 bp of total easing over the next 12 months.
National Bank of Hungary meets Tuesday and is expected to keep rates steady at 6.5%. At the last meeting April 29, the bank kept rates steady at 6.5% and said “Restrictive monetary policy contributes to the maintenance of financial market stability, the anchoring of inflation expectations consistently with the central bank target and, as a result, to the achievement of the inflation target in a sustainable manner by ensuring positive real interest rates.” Governor Varga added that rates would be kept at the current level for a “sustained period.” Despite this hawkish stance, the swaps market is pricing in 75 bp of easing over the next 12 months.
South African Reserve Bank meets Thursday and is expected to cut rates 25 bp to 7.25%. A few analysts polled by Bloomberg look for steady rates. 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.
Poland reports May CPI data Friday. Headline is expected to remain steady at 4.3% y/y. If so, inflation would continue to track well below the National Bank of Poland’s 2025 projection of 4.9%. At the last meeting May 7, the bank cut rates 50 bp to 5.25% and pushed back on expectations of an aggressive easing cycle. Governor Glapinski expressed doubts about a cut next month, adding that some MPC members see autumn data as key for more easing. Looking ahead, the swaps market is pricing in 100 bp of total easing over the next 12 months, followed by another 50 bp over the subsequent 12 months that would see the policy rate bottom near 3.75%.
ASIA
Bank of Korea meets Thursday and is expected to cut rates 25 bp to 2.5%. At the last meeting April 17, the bank kept rates steady at 2.75% but there was one dissent in favor of a 25 bp cut to 2.5%. The bank said growth had weakened more than expected due to US trade policy and domestic political uncertainty. It stressed that downside risks had increased significantly since February and so it will continue to maintain a policy bias towards more rate cuts. Governor Rhee said all six members of the board were open to a cut over the next three months, adding that with regards to the next meeting May 29, “Naturally, this will be interpreted as a stronger signal for a cut compared to what was said in the past.” Inflation is running close to the 2% target, while the strong won will help limit price pressures. The swaps market is pricing in 50 bp of total easing over the next 12 months that would see the policy rate bottom near 2.25%.
China reports official May PMIs Saturday. Manufacturing is expected to rise half a point to 49.5, while non-manufacturing is expected to rise two ticks to 50.6. if so, the composite should rise a few ticks from 50.2 in April. Caixin reports its PMIs next week. The impact of the trade war is starting to be felt by China and suggests more stimulus measures are in the pipeline.
