EM Preview for the Week of October 23, 2022

October 23, 2022

EM FX was mixed last week, taking advantage of the dollar’s swoon Friday to claw back some recent losses. BRL and the CEE currencies outperformed, while COP, ARS, and IDR underperformed. We do not expect the BOJ intervention to change the dollar’s upward trajectory. However, with no major U.S. data reports nor Fed speakers this week, we may see a period of consolidation ahead of the November 1-2 FOMC meeting. This may allow EM FX to build further on its gains near-term but we believe the fundamental backdrop for risk assets remains negative.


Mexico reports mid-October CPI Monday. Headline is expected at 8.62% y/y vs. 8.76% in mi-September. If so, it would be the first deceleration since mid-May but still well above the 2-4% target range. At the last policy meeting September 29, Banco de Mexico hiked rates 75 bp to 9.25%, as expected. It said “The Board will assess the magnitude of the upward adjustments in the reference rate for its next policy decisions based on the prevailing conditions.” The bank revised its inflation forecasts upwards, with headline inflation seen remaining at 8.6% through end-2022 and falling to 3.1% only by Q3 2024. Next policy meeting is November 10 and another 75 bp hike to 10.0% seems likely. The swaps market is pricing in 150 bp of tightening over the next 6 months that would see the policy rate peak near 10.75%. August GDP proxy will be reported Wednesday and is expected at 3.00% y/y vs. 1.27% in August. September trade data will be reported Thursday.

Brazil reports September current account and FDI data Monday. Mid-October IPCA inflation will be reported Tuesday. Headline is expected at 6.77% y/y vs. 7.96% in mid-September. If so, it would be the lowest since April 2021 and getting closer to the 2-5% target range. COPOM meets Wednesday and is expected to keep rates steady at 13.75%. At the last meeting September 21, COPOM kept rates steady for the first time since January 2021. However, there were two dissents in favor of another hike then. As a result, we think market expectations for an easing cycle starting in March may be too aggressive. September central government budget data will be reported Friday, where a primary surplus of BRL12.6 bln is expected. Next Sunday sees the runoff presidential vote and polls suggest the race is tightening up and one outlier has Bolsonaro ahead 46.9-45.9%. While we believe markets would prefer a Bolsonaro win, a Lula victory would not be seen as negative.

Chile central bank minutes will be released Thursday. At the October 12 meeting, the bank hike rates 50 bp to 11.25% and said “The Board estimates that the monetary policy rate has reached its maximum level of the cycle that began in July 2021, and that it will remain there for as long as necessary to ensure the convergence of inflation to the target over the two-year policy horizon.” Next policy meeting is December 6 and no change is expected then. For now, the market is taking the central bank at its word but we need to see some further moderation in inflation to confirm its stance. September IP, retail sales, and unemployment will be reported Friday.

Colombia central bank meets Friday and is expected to hike rates 100 bp to 11.0%. At the last policy meeting September 29, the bank delivered a dovish surprise and hiked rates 100 bp to 10.0% vs. 150 bp expected. The vote was 6-1 with the dissent in favor of a smaller 50 bp move. The bank raised its 2022 growth forecast to 7.8% vs. 6.9% previously but cut its 2023 forecast to 0.7% vs. 1.1% previously. It noted that “Over the next months, there are signs of deceleration in productive activity. The fears of a global recession have increased, causing reductions in commodities prices.” This is a very different tone than the previous policy meeting July 29, when the bank hiked 150 bp and Governor Villar said then that “The excess of demand continues, with economic activity that remains strong. World inflation has continued to increase, and acquired a greater persistence.” Since then, September inflation came in at 11.44% y/y, the highest since March 1999 and further above the 2-4% target range. Despite the dovish hold, the swaps market is pricing in 275 bp of tightening over the next 6 months that would see the policy rate peak near 12.75%.


National Bank of Hungary meets Tuesday and is expected to keep rates steady at 13.0%. At the last policy meeting September 27, the bank delivered a hawkish surprise by hiking rates 125 bp to 13% vs. 100 bp expected. However, it also announced that it is ending the tightening cycle. The bank said it would maintain tight monetary conditions and will use “other tools” to rein in inflation as it focuses on tightening liquidity. Hungary joins Poland and Czech in trying to end the tightening cycle. It has a chance at being more successful as its 13% policy rate is much higher than 7.0% in Czech and 6.75% in Poland. Of note, CPI came in at 20.1% y/y in September, the highest since November 1996 and further above the 2-4% target range. As such, the swaps market is pricing in another 50 bp hike to 13.5% over the next 3 months. Much will depend on the forint, as further weakness would increase the likelihood of another hike.

Russia central bank meets Friday and is expected to keep rates steady at 7.5%. However, a handful of analysts polled by Bloomberg look for a 25 or 50 bp cut. At the last meeting September 16, the bank cut rates 50 bp to 7.5%, as expected. The bank said it would monitor the economy for future rate decisions. At the previous policy meeting July 22, the bank predicted that the policy rate would average between 7.4-8.0% from then until year-end and the rate is now at the bottom of that range. CPI rose 13.7% y/y in September vs. 14.3% y/y in August, decelerating for the fifth straight month to the lowest since February but still well above the 4% target. Further cuts may be difficult as the bank noted last month that a wider budget deficit may require tighter policy.


China may report Q3 GDP and September IP and retail sales data this week. It was delayed last week and there were no reasons given for the change or any further information on the actual release data. Local analysts blamed the delay on the party congress, which just ended this weekend. As expected, President Xi won a third term and filled the Politburo and its top Standing Committee with loyalists . As a result, China has come full circle back to one-man rule that it had moved away from after Mao. Of note, Premier Li, PBOC Governor Yi, and other senior members of the economic team were left off of the larger Central Committee. While this does not automatically mean they will step down from their posts, all are around the official retirement age of 65. The changing of the guard comes at a difficult time for the mainland economy and should be seen as a risky move.

Singapore reports September CPI Tuesday. Headline is expected to remain steady at 7.5% y/y while core is expected to pick up a tick to 5.2% y/y. September IP will be reported Wednesday and is expected at 2.1% y/y vs. 0.5% in August. The MAS just tightened policy this month for the fifth time this cycle. The next scheduled meeting isn’t until April but if price pressures start to level out, it may be able to keep policy steady then.

Korea reports Q3 GDP Thursday. Growth is expected at 0.2% q/q vs. 0.7% in Q2, while the y/y rate is expected to remain steady at 2.9%. The economy remains sluggish due to the combination of monetary tightening and slower regional growth. However, inflation remains elevated and so the Bank of Korea has no choice but to continue hiking. The swaps market is pricing in another 100 bp of tightening over the next 6 months that would see the policy rate peak near 4.0%. Next policy meeting is November 24 and another 50 hike seems likely then.

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