EM FX was mostly softer last week as the broad-based dollar recovery continued. ZAR, PLN, and MXN outperformed while BRL, PHP, and MYR underperformed. Data this week should continue to underscore the widening economic and monetary policy divergences that have favored the dollar in recent weeks. EM FX should remain under pressure, all the more so as the risk rally may run out of steam after the disappointing fiscal news out of China this weekend (see below).
AMERICAS
Three of the major Latin American economies report August GDP proxies. Brazil reports Monday and is expected at 2.9% y/y vs. 5.3% in July. Peru reports Tuesday and is expected at 3.3% y/y vs. 4.5% in July. Colombia reports Friday and is expected at 1.6% y/y vs. 3.7% in July. Chile has already reported at 2.3% y/y vs. 4.2% in July, while Mexico reports next week. The regional recovery is running out of steam, which should keep pressure on the central banks to continue cutting rates. In turn, this should tend to weaken their currencies.
Chile central bank meets Thursday and is expected to cut rates 25 bp to 5.25%. At the last meeting September 3, the bank cut rates 25 bp to 5.5% and warned that both bank credit and consumer spending were weak. The bank added that if the economy meets its forecasts, “the reduction of the key rate toward its neutral level will be somewhat faster than expected in June.” Since then, September inflation came in 4.1% y/y vs. 4.7% in August, the first deceleration since March and nearing the 2-4% target range. The swaps market is pricing in 125 bp of total easing over the next 12 months that would see the policy rate bottom near 4.25%..
EUROPE/MIDDLE EAST/AFRICA
Israel reports September CPI data Tuesday. Headline is expected to pick up two ticks to 3.8% y/y. if so, it would be the highest since September 2023 and further above the 1-3% target range. Last week, the Bank of Israel delivered a hawkish hold. Governor Yaron said a rate hike is possible if inflation rises more than expected. Of note, it forecasts 2024 inflation at 3.8% vs. 3.0% in July and 2025 inflation steady at 2.8%. The bank’s research department also sees the policy rate still at the current 4.5% in Q3 2025. In the July projections, the rate was seen falling to 4.25% in Q2 2025. Next policy meeting is November 25 and no change is expected then. Given the hawkish guidance, the market is pricing in steady rates over the next 12 months.
Poland reports September core CPI Wednesday. Core is expected at 4.3% y/y vs. 3.7% in August. If so, it would be the highest since March and match the rise in headline. At the last meeting October 2, the bank delivered a dovish hold. After saying rates would not be cut until next year, Governor Glapinski changed his tune and said, “It could happen in March, April, or earlier.” He added that “I’ve become softer, looking at the causes of inflation. I see that economic growth abroad has stalled. I hope that these factors will mean that the March projection will convince MPC members to start a cycle of cuts.” The market is pricing in 25 bp of easing over the next three months, as well as 75 bp of total easing over the next 12 months.
Turkey central bank meets Thursday and is expected to keep rates steady at 50.0%. At the last meeting September 19, the bank kept rates steady at 50.0% but began setting the table for a rate cut by leaving out a previous pledge to hike rates further if needed. This meeting seems too soon for a cut as core inflation remains uncomfortably high around 49% y/y. Instead, we look for the first cut at the November 21 meeting. The swaps market is pricing in 300 bp of total easing over the next three months, which seems about right.
ASIA
On Saturday, China Ministry of Finance pledged that more fiscal spending is in the pipeline but did not offer any hard numbers. Instead, Finance Minister Lan said the central government “has room” to raise debt and increase the deficit. In the meantime, Lan pointed out that local governments can tap funding from unused bond quota worth 2.3 trillion yuan by year-end. This is not fresh stimulus. Lan also introduced broad set of measures aimed at reducing local government debt and stabilizing the property market. First, a one-time and large-scale debt ceiling increase will be introduced for local governments to swap their so-called “hidden” or off-balance sheet debt. Second, local governments will be allowed to use special bonds to purchase idle land from troubled developers or buy unsold homes and turn them into subsidized housing. Detailed fiscal spending measures are expected to be unveiled later this month at a meeting of the Standing Committee of the National People’s Congress. The prospect of more aggressive fiscal stimulus measures from China should continue to support Chinese equity markets and growth sensitive currencies. However, until the size and target of the additional fiscal package are clear, mainland assets are unlikely to see any further significant gains.
The economy is still struggling to escape a deflationary spiral. Over the weekend, September CPI unexpectedly fell two ticks to 0.4% y/y vs. 0.6% expected while core dropped two ticks to 0.1% y/y, the lowest rate since February 2021. PPI also fell two ticks more than expected to -2.8% y/y, which will add downside pressure to CPI inflation. To escape the debt-deflation loop, Chinese policymakers needs to ramp up fiscal measures to boost consumption growth whilst addressing the huge debt overhang. Until we see this, we believe the recent bounce in China assets will prove unsustainable.
China reports September money and credit data sometime this week. New loans are expected at CNY1.9432trln vs. CNY903 bln in August, while aggregate financing is expected at CNY3.576 trln vs. CNY3.031 trln in August. The September data will not reflect the People’s Bank of China’s pump-priming measures announced and implemented in late September. However, we expect money and new loan data to pick up modestly in the coming months. September trade data will be reported Monday. Exports are expected at 6.0% y/y vs. 8.7% in August, while imports are expected at 0.7% y/y vs. 0.5% in August. Q3 GDP data as well as September IP, retail sales, FAI, property investment, and home prices will be reported Friday. GDP is expected to grow 1.1% q/q vs. 0.7% in Q2, while the y/y rate is expected to fall two ticks to 4.5%. IP is expected to pick up a tick to 4.6% y/y, while sales are expected to pick up four ticks to 2.5% y/y.
Monetary Authority of Singapore meets Monday. Q3 GDP data will be reported Monday. Growth is expected at 2.0% q/q vs. 0.4% in Q2, while the y/y rate is expected at 3.8% vs. 2.9% in Q2. With growth remaining solid and core inflation still elevated, we expect another hold by the MAS. At the last meeting July 26, it also kept policy steady. Indeed, the last time the MAS tweaked its policy stance was at the October 2022 meeting, when it tightened policy by re-centering S$NEER higher to the upper end of the band. Looking ahead, the MAS could ease policy at its January meeting if price pressures ease.
India reports September CPI and WPI data Monday. Headline CPI is expected at 5.11% y/y vs. 3.65% in August, while WPI is expected at 2.00% y/y vs. 1.31% in August. Reserve Bank of India just kept rates steady at 6.5% last week, as expected. However, it was a dovish hold as the bank voted to move its stance to “neutral” from “withdrawal of accommodation” previously. It’s clear that the bank is setting the table for a rate cut that could come at the next meeting December 6. The swaps market is pricing in steady rates over the next three months followed by 25 bp of easing over the subsequent three months. Looking ahead, the market sees 50 bp of total easing over the next 12 months.
Bank of Thailand meets Wednesday and is expected to keep rates steady at 2.5%. Only 3 of the 21 analysts polled by Bloomberg look for a 25 bp cut to 2.25%. At the last meeting August 21, the bank delivered a dovish hold as it noted that “The Committee deems that it is crucial to closely monitor the impacts of deterioration in credit quality on borrowing costs and overall credit growth, which could disturb economic activities.” The swaps market is pricing in 25 bp of easing over the next three months, followed by another 25 bp of easing over the subsequent three months.
Philippines central bank meets Wednesday and is expected to cut rates 25 bp to 6.0%. At the last meeting August 15, the bank started the easing cycle with a 25 bp cut to 6.25%. Governor Remolona said “It’s one move. We may need further moves in the same direction” and added that another 25 bp cut was possible in either October or December. Remolona added that “We’re somewhat more confident in the inflation numbers coming down than in the GDP numbers going up.” The swaps market is pricing in 225 bp of total easing over the next 12 months that would see the policy rate bottom near 4.0%.
Bank Indonesia meets Wednesday and is expected to keep rates steady at 6.0%. However, 7 of the 26 analysts polled by Bloomberg look for a 25 bp cut to 5.75%. At the last meeting September 18, the bank delivered a dovish surprise and started the easing cycle with a 25 bp cut to 6.00%. Governor Warjiyo said that “The time is right” and added that “Going forward, Bank Indonesia will continue to keep an eye on the room for lowering policy rate in line with low inflation forecast, the stable and appreciating rupiah, and the need to boost economic growth higher.” We think the strong rupiah was a big factor and so its recent weakness argues for a hold this week. If and when the rupiah recovers, the bank is likely to resume cutting rates cautiously.