EM FX was mostly weaker last week as the dollar mounted a bit of a comeback. MYR, TWD, and PEN outperformed while CLP, COP, and KRW underperformed. There are no major U.S. data releases this holiday-shortened week but FOMC minutes Wednesday should help underscore the Fed’s commitment to ongoing tightening. We remain defensive on EM FX as we believe the dollar uptrend remains largely intact.
AMERICAS
Brazil reports mid-November IPCA inflation Thursday. Headline is expected at 6.22% y/y vs. 6.85% in mid-October. If so, it would be the lowest since March 2021 and moving closer to the 2-5% target range. Of note, this range falls to 1.5-4.5% in 2023. The monetary policy outlook has been upended by President-elect Lula after he signaled looser fiscal policy is likely. He has since walked that back a little but markets are likely to remain volatile near-term until the economic team is announced. The swaps market is now pricing in another 75 bp of tightening over the next 6 months that would see the policy rate peak near 14.5% vs. 13.75% previously. Next COPOM meeting is December 7 and rates are expected to remain steady at 13.75%. October current account and FDI data will be reported Friday.
Mexico reports mid-November CPI Thursday. Headline is expected at 8.21% y/y vs. 8.53% in mid-October. If so, it would continue the deceleration that began in October. Banco de Mexico releases its minutes Thursday too. At that meeting, it hiked rates 75 bp and said “In its next meetings, the Board will assess the magnitude of the upward adjustments to the reference rate based on the prevailing conditions.” This suggests a possible slowdown in the pace of rate hikes, and there was one dissent in favor of a smaller 50 bp move. Next Banxico meeting is December 15 and the bank may opt for a 50 bp hike then if inflation continues to fall. The swaps market is now pricing in another 100 bp of tightening over the next 6 months that would see the policy rate peak near 11.0%. Q3 current account data will be reported Friday.
EUROPE/MIDDLE EAST/AFRICA
Bank of Israel meets Monday and is expected to hike rates 75 bp to 3.5%. However, the market is split as nearly half the analysts polled by Bloomberg look for a smaller 50 bp move. At the last policy meeting October 3, the bank hiked rates 75 bp to 2.75%, as expected. Its research department saw the policy rate at 3.5% in one year. Of note, the swaps market is pricing in a peak policy rate near 3.0%. October CPI came in at 5.10% y/y vs. 4.59% in September, the highest since October 2008 and further above the 1-3% target range. As such, we believe market pricing will eventually move closer to the bank’s forward guidance.
Poland reports October IP, employment, and PPI data Tuesday. IP is expected at 7.5% y/y vs. 9.8% in September, employment is expected at 2.2% y/y vs. 2.3% in September, and PPI is expected at 23.5% y/y vs. 24.6% in September. Real retail sales and construction output will be reported Thursday. Sales are expected at 3.1% y/y vs. 4.1% in September, while construction is expected at 0.2% y/y vs. 0.3% in September. The economy is clearly slowing but inflation came in at 17.9% y/y in October, the highest since August 1996 and further above the 1.5-3.5% target range. Next central bank policy meeting is December 7. While rates are expected to remain steady at 6.75%, the swaps market is starting to price in a potential hike even though the bank has signaled an end to the tightening cycle.
National Bank of Hungary meets Tuesday and is expected to keep the base rate steady at 13.0%. At the last policy meeting October 25, the bank kept rates steady at 13.0%. Since then, October CPI came in at 21.1% y/y vs. 20.1% in September, the highest since September 1996 and further above the 2-4% target range. While the bank has signaled an end to the tightening cycle, it is likely to use its 1-day and 1-week deposit rates to support the forint as needed.
South Africa reports October CPI Wednesday. Headline is expected at 7.4% y/y vs. 7.5% in September, while core is expected at 4.9% y/y vs. 4.7% in September. If so, headline would decelerate for the third straight month from the 7.8% peak in July but still above the 3-6% target range. SARB then meets Thursday and is expected to hike rates 75 bp to 7.0%. However, a handful of analysts polled by Bloomberg look for a smaller 50 bp move while one looks for a larger 100 bp move. At the last meeting September 22, the bank hiked rates 75 bp to 6.25%, as expected. The vote was 3-2, with the dissents in favor of a larger 100 bp hike. Of note, its model rate path was little changed and saw the policy rate at 5.60% by year-end vs. 5.61% previously, at 6.36% by end-2023 vs. 6.45% previously, and at 6.76% by end-2024 vs. 6.78% previously. However, the swaps market is now pricing in another 125 bp of tightening over the next 12 months that would see the policy rate peak near 7.5%.
Turkey central bank meets Thursday and is expected to cut rates 150 bp to 9.0%. At the last policy meeting October 20, the bank delivered a dovish surprise and cut rates 150 bp to 10.5% vs. 100 bp expected. The bank also said then that it would consider “taking a similar step at the following meeting and ending the rate-cut cycle.” Even if the easing cycle ends, the damage has been done. Inflation shows no signs of letting up even as a growing twin deficits problem is developing. Until interests are allowed to move higher, those deficits will become increasingly harder to finance. We continue to look for a balance of payments crisis in 2023 that eventually morphs into a full-blown economic crisis.
ASIA
China’s commercial banks set their key Loan Prime Rates Monday. The 1-year rate is expected to remain steady at 3.65% and the 5-year rate is expected to remain steady at 4.30%. The PBOC just left its key 1-year MLF rate steady at 2.75% last week but also added liquidity to the system several times to push interbank rates down. China’s commitment to Covid Zero is likely to strengthen after the first COVID death in over six months was reported this weekend in Beijing. Mainland officials said China is open to a possible meeting with the U.S. of defense ministers at a summit in Cambodia later this month.
Taiwan reports October export orders Monday. Orders are expected at -1.9% y/y vs. -3.1% in September. October IP will be reported Thursday and is expected at -2.5% y/y vs. -4.8% in September. The regional chill from the slowdown in mainland China is unlikely to improve anytime soon. Taiwan Semiconductor Manufacturing Company (TSMC) recently announced it would open a second plant in Arizona, deepening ties to the U.S. as tensions with the mainland remain high. The company is also building a plant in Japan and is in talks with Germany about a possible facility there.
Korea reports trade data for the first 20 days of November Monday. Bank of Korea meets Thursday and is expected to hike rates 25 bp to 3.25%. At the last policy meeting October 12, the bank hiked rates 50 bp to 3.0%, as expected. There were two dissents in favor of a smaller 25 bp move. The bank noted then that “The Board sees continued rate hikes as warranted, as inflation is expected to remain high, substantially above the target level, although domestic economic activity has slowed.” Governor Rhee added that the bank expects rates to be around 3.5% at the end of this tightening cycle. Of note, the swaps market is pricing a peak policy rate near 3.25% but we expect the market to move closer to the bank’s forward guidance.
Singapore reports October CPI data Wednesday. Headline is expected at 7.0% y/y vs. 7.5% in September, while core is expected to remain steady at 5.3% y/y. While the MAS does not have an explicit inflation target, rising pressures led it to tighten five times this past year, the latest in October. Next scheduled policy meeting is in April but the MAS will not hesitate to move intra-meeting if needed, as it has already done twice in this cycle. IP will be reported Friday and is expected at -2.1% y/y vs. 0.9% in September.
Malaysia reports October CPI data Friday. Headline is expected at 3.9% y/y vs. 4.5% in September. If so, it would be the second straight month of deceleration from the 4.7% peak in August and the lowest since June. While the bank does not have an explicit inflation target, rising price pressures should keep the tightening cycle going for now. Next policy meeting is January 19 and another 25 bp hike to 3.0% seems likely. At the last policy meeting November 3, Bank Negara hiked rates 25 bp to 2.75% and noted that the hike would “pre-emptively manage the risk of excessive demand on price pressures consistent with the recalibration of monetary policy settings that balances the risks to domestic inflation and sustainable growth.” It added that it is not on any pre-set course and that future decisions will remain data dependent as well as “measured and gradual.” The swaps market is pricing in 75 bp of tightening over the next 12 months that would see the policy rate peak near 3.5%. Politics are in focus after weekend elections produced the country’s first hung parliament. Both Anwar and Muhyiddin claim to have the votes necessary to form a government.
