EM FX was mixed last week despite broad-based dollar weakness against the majors. BRL, PLN, and RON outperformed while RUB, TRY, and ARS underperformed. Fears of a U.S. recession have weighed on U.S. yields and the dollar. While we remain constructive on the U.S. outlook, May data this week (jobs, PMIs, etc.) will be key to any sort of dollar rebound. We continue to believe that the global backdrop for EM remains difficult and so we look for EM FX to eventually weaken again.
AMERICAS
Brazil reports April consolidated budget data Tuesday. A primary surplus of BRL31.7 bln is expected vs. BRL4.3 bln in March. May trade data will be reported Wednesday. Q1 GDP data will be reported Thursday. Growth is expected at 1.2% q/q and 2.0% y/y vs. 0.5% and 1.6% in Q4, respectively. April IP will be reported Friday and is expected at -0.8% y/y vs. -2.1% in March. The economy is starting to pick up despite the aggressive tightening seen so far in this cycle. The swaps market sees the policy rate peaking near 13.5% over the next 3 months followed by the start of an easing cycle in early 2023. Next meeting is June 16 and a 50 bp hike to 13.25% is expected.
Chile reports April unemployment Monday. The rate is expected to rise a tick to 7.9%. IP and retail sales will be reported Tuesday. Manufacturing is expected at 1.9% y/y vs. 3.3% in March, while sales are expected at 16.8% y/y vs. 11.2% in March. April GDP proxy will be reported Wednesday and is expected at 8.7% y/y vs. 7.2% in March. The economic outlook remains solid even as price pressures remain high. CPI rose 10.5% y/y in April, the highest since August 1994 and further above the 2-4% target range. The bank delivered a hawkish surprise this month with a 125 bp hike to 8.25% vs. 100 bp expected. Next meeting is June 7 and another 125 bp hike to 9.5% is possible. Of note, the swaps market sees the policy rate peaking at 9.5% followed by the start of an easing cycle before year-end.
Peru reports May CPI Wednesday. Headline is expected at 8.23% y/y vs. 7.96% in April. If so, it would be the highest since May 1998 and further above the 1-3% target range. The central bank has been hiking rates in 50 bp clips this entire year. At the last meeting May 12, the bank saw inflation peaking in July and returning to the target range around Q2-Q3 2023. Next policy meeting is June 9 and another 50 bp hike to 5.5% is expected.
Banco de Mexico releases its quarterly inflation report Wednesday. Given recent comments and decisions, we expect the report to tilt hawkish. At the May meeting, it hiked rates 50 bp to 7.0% by a 4-1 vote, with Deputy Governor Espinosa dissenting in favor of a 75 bp hike. However, the minutes showed that two more policymakers were open to a larger move. One of these two is likely Deputy Governor Heath, who recently noted risks of a 75 bp move at the next policy meeting June 23. It will be a very close call between 50 and 75 bp and will depend on how the data come in. The swaps market now sees 225-250 of tightening over the next 12 months that would see the policy rate peak between 9.25-9.50%.
Colombia reports May CPI Saturday. Headline is expected at 9.08% y/y vs. 9.23% in April. If so, it would be the first deceleration since March 2021 but still well above the 2-4% target range. The bank hiked 100 bp for the third straight time to 6.0% at the last meeting April 29 by a 4-3 vote, with the dissents in favor of a larger 150 bp move. Next meeting is June 20 and another 100 bp hike to 7.0% seems likely, with some risks of a hawkish surprise if inflation continues to rise. The swaps market sees 325 of tightening over the next 6 months that would see the policy rate peak near 9.25%. Colombia holds elections today and polls suggest no candidate will win in the first round and so a runoff between the top two candidates June 19 is likely.
EUROPE/MIDDLE EAST/AFRICA
South Africa reports April budget data Monday. Trade, money, and private sector credit, and Q1 unemployment data will all be reported Tuesday. Reports suggest the SARB will shift to a new monetary policy framework June 8 that moves to maintaining surplus bank reserves from the current deficit system. The bank stressed that “The amendments to the framework are technical in nature and will affect how monetary policy is implemented but will not affect the inflation target range or the interest rate decisions of the MPC.” The bank just hiked rates 50 bp to 4.75% and indicated a slightly steeper rate path. The policy rate is now seen at 5.3% by end-2022, 6.21% by end-2023, and 6.74% by end-2024. Next policy meeting is July 21 and we believe a 25 bp hike to 5.0% is likely.
Turkey reports April trade and Q1 GDP data Tuesday. A trade deficit of -$6.1 bln is expected, while growth is expected at 1.3% q/q and 7.4% y/y vs. 1.5% and 9.1% in Q4, respectively. May CPI and PPI data will be reported Friday. Headline CPI is expected at 74.40% y/y vs. 69.97% in April, core is expected at 55.70% y/y vs. 52.37% in April, and PPI is expected at 128.00% y/y vs. 121.82% in April. The central bank just kept rates steady at 14% Friday but hinted at new measures ahead. Next meeting is June 23 but comments from President Erdogan suggest rate hikes are not imminent as he said “Those who try to impose on us a link between the benchmark rate and inflation are either illiterates or traitors.”
Poland reports May CPI Tuesday. Headline is expected at 13.5% y/y vs. 12.4% in April. If so, it would be the highest since December 1997 and further above the 1.5-3.5% target range. The central bank accelerated its pace of tightening from 50 bp to 75 bp in March and 100 bp in April before moving back to 75 bp in May. Next policy meeting is June 8 and another 75 bp hike to 6.0% is likely, with risks of a hawkish surprise. The swaps market is pricing in 125 bp of tightening over the next 12 months that would see the policy rate peak near 6.5%. We see upside risks.
National Bank of Hungary meets Tuesday and is expected to hike rates 50 bp to 5.90%. Several analysts see a larger hike of 60 or 75 bp. The bank is also expected to hike its 1-week deposit rate 30 bp to 6.75% at its weekly tender Thursday. CPI rose 9.5% y/y in April, the highest since June 2001 and further above the 2-4% target range. The swaps market is pricing in 135 bp of tightening over the next 12 months that would see the policy rate peak near 6.75%. We see upside risks. April PPI will also be reported Tuesday. April retail sales will be reported Friday and are expected at 13.8% y/y vs. 16.2% in March.
ASIA
Korea reports April IP Tuesday. IP is expected at 3.0% y/y vs. 3.7% in March. May trade data will be reported Wednesday. Exports are expected at 19.5% y/y vs. 12.9% in April, while imports are expected at 32.5% y/y vs. 18.6% in April. May CPI will be reported Friday. Headline is expected at 5.1% y/y vs. 4.8% in April. If so, it would be the highest since September 2008 and further above the 2% target. Bank of Korea just hiked rates 25 bp to 1.75% last week, as expected. It was Governor Rhee’s first meeting and he signaled that the BOK was focused on fighting inflation. He said it was “reasonable” that the market is pricing in a policy rate of 2.5% by year-end. He also revealed that the bank was debating whether to make public its view on the neutral rate for policy. Next meeting is July 13 and another 25 bp hike is possible then. Looking further out, the swaps market sees the policy rate peaking near 3.0% over the next 12 months.
China reports official May PMI readings Tuesday. Manufacturing is expected at 49.0 vs. 47.4 in April, while non-manufacturing is expected at 45.0 vs. 41.9 in April. if so, the composite would rise significantly from 42.7 in April, which is truly unbelievable given the strict COVID Zero policies still in place. While some restrictions in Beijing and Shanghai will be relaxed this week, it is likely too late to be reflected in the May PMI readings. Caixin reports its May manufacturing PMI Wednesday and is expected at 49.5 vs. 46.0 in April.
Indonesia reports May CPI Thursday. Headline is expected at 3.59% y/y vs. 3.47% in April, while core is expected at 2.70% y/y vs. 2.60% in April. If so, headline would be the highest since December 2017 and nearing the top of the 2-4% target range. Bank Indonesia just left rates steady at 3.5% last week. However, it raised reserve requirements to 9% starting in September vs. 6.5% previously planned. Governor Warjiyo said the move would remove IDR110 trln ($7.5 bln) of liquidity from the banking system and comes on top of the planned IDR200 trln rupiah reduction from the steps announced back in January. We think liftoff is very likely at the next meeting June 23.
