EM FX remained under pressure last week as the broad-based dollar rally continued. HUF, PLN, and TRY outperformed while CLP, BRL, and THB underperformed. With the lack of any new major fundamental drivers this week, the greenback may consolidate its recent gains and given EM FX some breathing room. However, the dollar is likely to continue climbing as Fed tightening expectations continue to adjust. Also, concerns about global growth are likely to persist with uncertainty in China remaining high as the Communist Party Congress gets under way. As such, we remain defensive on EM FX.
Colombia reports August GDP Proxy Tuesday. Growth is expected at 7.3% y/y vs. 6.4% in July. Peru and Brazil reported their August GDP proxies Monday and were both better than expected. Regional growth remains resilient despite aggressive monetary tightening cycles and lower commodity prices. When investors rotate back into EM (likely a 2023 story), we believe Latin America is likely to outperform both Asia and EMEA. Colombia trade data will be reported Wednesday.
South Africa reports September CPI and August retail sales Wednesday. Headline is expected to remain steady at 7.6% y/y, while core is expected to pick up to 4.7% y/y vs. 4.4% in August. At the last policy 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 sees 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 pricing in a peak policy rate near 8.0% over the next 12 months. Elsewhere, sales are expected at 5.0% y/y vs. 8.6% in July.
Bank of Israel releases its minutes Wednesday. At the October 3 meeting, the bank hiked rates 75 bp to 2.75%, as expected. Governor Yaron stressed that the bank is front-loading its rate hikes because it’s “determined to return the inflation rate to within the target range.” The bank updated its macro forecasts and now sees the policy rate at 3.5% a year from now vs. 2.75% seen a year ahead at the July 4 meeting. Of note, the swaps market is now pricing in 75-100 bp of tightening over the next 6 months that would see the policy rate peak between 3.50-3.75%.
Poland reports September IP and PPI Thursday. IP is expected at 8.8% y/y vs. 10.9% in August, while PPI is expected to remain steady at 25.5% y/y. Real retail sales will be reported Friday and is expected at 4.6% y/y vs. 4.2% in August. Despite some moderation in recent months, the economy remains resilient and price pressures remain high. At the last policy meeting October 5, the central bank delivered a dovish surprise and kept rates steady at 6.75% vs. an expected 25 bp hike to 7.0%. The bank noted that “A further slowdown of GDP growth is forecast for the coming quarters, while the economic outlook is subject to significant uncertainty.” However, September CPI came in much higher than expected at 17.2%, the highest since September 1996 and further above the 1.5-3.5% target range. As a result, the market does not believe the central bank can end its tightening cycle yet. The swaps market is pricing in 100 bp of tightening over the next 12 months that would see the policy rate peak near 7.75%.
Turkey central bank meets Thursday and is expected to cut rates 100 bp to 11.0%. The bank has delivered two straight dovish surprises and so markets are now adjusting for a continuation of this new easing cycle despite still-rising inflation. The budget outlook will get worse as the government is proposing a draft budget for 2023 that contains a huge increase in energy subsidies. Vice President Fuat Oktay acknowledged that it is subsidizing 80% of natural gas and 50% of electricity used by households, adding that these subsidies will boost the 2023 budget deficit by TRY 600 bln ($32 bin). With interest rates kept so low, Turkey will have trouble financing the twin deficits. This experiment cannot go on indefinitely and the country is setting itself up for an eventual crisis. The best that President Erdogan can hope for is that the crisis will hit after the June elections.
In China, all eyes are on the 20th National Congress of the Chinese Communist Party that began Sunday. It will run until next Saturday and should see President Xi reelected for a third term. This is a tightly choreographed event and expect few surprises. If there are any, we believe it will be to the upside in the form as massive stimulus. As things stand, policymakers have not been as aggressive as we would expect given the depth and breadth of the slowdown. Concerns are rising after the National Bureau of Statistics updated its release schedule for Q3 GDP and September IP and retail sales data from tomorrow to “delayed.” There were no reasons given for the change and no further information on the actual release data. Local analysts blamed the delay on the party congress. Elsewhere, PBOC kept its 1-year MLF rate steady at 2.75% today, as expected. Commercial banks will set their key 1- and 5-year Loan Prime Rates Thursday and are expected to keep them steady as well at 3.65% and 4.30%, respectively. September trade data will be reported sometime this week. Exports are expected at 4.0% y/y vs. 7.1% in August and imports are expected at flat y/y vs. 0.3% in August.
Bank Indonesia meets Thursday and is expected to hike rates 50 bp to 4.75%. However, nearly a third of the analysts polled by Bloomberg see a smaller 25 bp move. At the last policy meeting September 22, the bank hiked rates 50 bp to 4.25% vs. 25 bp expected and was the second straight hawkish surprise. Governor Warjiyo said then that “The decision to increase interest rates is a front loaded, pre-emptive, and forward looking step to lower inflation expectations and ensure core inflation returns to the target of 2-4% in the second half of 2023, as well as to strengthen the rupiah stabilization policy.” Warjiyo added that headline inflation is expected to peak above 6% by end-2022, reflecting the impact of the recent fuel price hike. CPI rose 5.95% y/y in September, the highest since October 2015 and well above the 2-4% target range.
Taiwan reports September export orders Thursday. Orders are expected at -5.0% y/y vs. 2.0% in August. If so, this would be the weakest since April and would continue the overall weakening trend seen all year. Korea reports trade data for the first 20 days of October Friday. Like Taiwan, Korean exports have also been hit hard by the slowdown in mainland China. This is one of the reasons that we are not as constructive on Emerging Asia, though regional fundamentals remain sound.