EM FX was mostly softer last week as the dollar continued its broad-based recovery against the majors. IDR, THB, and TWD outperformed while CLP, MXN, and COP underperformed. The data continue to show a robust U.S. economy that is not in any need of aggressive Fed easing. Preliminary October PMIs should show continued economic divergences that will feed into monetary policy divergences, all of which should favor the dollar.
AMERICAS
Brazil reports mid-October IPCA inflation Thursday. Headline is expected at 4.44% y/y vs. 4.12% in mid-September. If so, it would be approaching the top of the 1.5-4.5% target range. At the last policy meeting September 18, COPOM started the tightening cycle with a 25 bp hike to 10.75% and delivered a hawkish statement. Next meeting is November 6 and a 50 bp hike to 11.25% is priced in. Looking ahead, the swaps market is pricing in 275 bp of total tightening over the next 12 months.
Mexico reports mid-October CPI data Thursday. Headline is expected at 4.67% y/y vs. 4.50% previously while core is expected at 3.82% y/y vs. 3.88% previously. At the last policy meeting September 26, Banco de Mexico delivered the second straight 25 bp cut by a 4-1 vote that took the policy rate down to 10.5%. It said that inflation may allow for the discussion of more rate cuts, adding that the balance of risks to growth were biased to the downside. Next meeting is November 14 and another 25 bp cut seems likely. The swaps market is pricing in 125 bp of total easing over the next 12 months.
EUROPE/MIDDLE EAST/AFRICA
National Bank of Hungary meets Tuesday and is expected to keep rates steady at 6.5%. At the last meeting September 24, the bank cut rates 25 bp to 6.5% and Deputy Governor Virag said “The Monetary Council will continue to make cautious, patient and stability-oriented decisions.” Since then, the forint has weakened and EUR/HUF made new highs above 400. Last week, Virag said “The MNB may not only pause interest rate cuts in October. If the external environment and inflation outlook justify, the base rate may stay unchanged for a sustained period, raising our interest premium.” The swaps market is pricing in 50 bp of total easing over the next 12 months.
South Africa reports September CPI data Wednesday. Headline is expected at 3.8% y/y vs. 4.4% in August, while core is expected to remain steady at 4.1% y/y. If so, headline would be the lowest since March 2021 and nearing the bottom of the 3-6% target range. At the last policy meeting September 19, the South African Reserve Bank started the easing cycle with a 25 bp cut to 8.0%. The vote was unanimous and a limited easing cycle was flagged as the research department’s model saw the policy rate at 7.86% by end-2024, 7.17% by end-2025, and 7.09% by end-2026. The swaps market seems to agree as it sees the policy rate bottoming around 7.25% over the next 12 months.
ASIA
China commercial banks will set their Loan Prime Rates Monday. The 1- and 5-year LPRs are both expected to be cut 20 bp to 3.15% and 3.65%, respectively. This would match the cut to the policy-relevant seven-day reverse repo rate on September 27. The PBOC will also set its 1-year MLF rate this week and is expected to keep it steady at 2.0%. We remain skeptical that the stimulus measures announced so far will have much lasting impact on the economy.
Malaysia reports Q3 GDP data Monday. September CPI will be reported Thursday. Headline is expected to remain steady at 1.9% y/y. While Bank Negara does not have an explicit inflation target, low price pressures should allow it to begin an easing cycle in the coming quarters. The swaps market is pricing in steady rates over the next six months, followed by the possible start of an easing cycle over the subsequent six months.
Taiwan reports September export orders Monday. Headline is expected at 5.2% y/y vs. 9.1% in August. If so, it would be very disappointing given the low base effects from last year. September IP will be reported Wednesday and is expected at 11.00% y/y vs. 13.42% in August. The swaps market is pricing in steady rates over the next three months, followed by a likely 12.5 bp hike over the subsequent nine months.
Singapore reports September CPI data Wednesday. Headline is expected at 1.9% y/y vs. 2.2% in August, while core is expected to remain steady at 2.7% y/y. While the Monetary Authority of Singapore does not have an explicit inflation target, elevated core inflation kept it on hold this week. It noted that “The risks to Singapore’s inflation outlook are more balanced compared to three months ago” and added that the “monetary policy settings are for now still consistent with medium-term price stability.” If price pressures ease in the coming months, we believe the MAS will being loosening policy at its January meeting. September IP will be reported Friday and is expected at 3.4% y/y vs. 21.0% in August.