EM FX was mixed last week despite the dollar’s broad-based losses against the majors. COP, HUF, and PLN outperformed while CLP, ARS, and KRW underperformed. Risk appetite saw an upswing last week but remains vulnerable to a worsening global growth outlook and tightening global liquidity. We believe the broad dollar rally remains intact and view last week’s selloff as corrective in nature.
AMERICAS
Brazil reports July retail sales Wednesday. Sales are expected at -3.5% y/y vs. -0.3% in June. July GDP proxy will be reported Thursday and is expected at 2.80% y/y vs. 3.09% in June. The economy remains sluggish due largely to aggressive monetary tightening. However, inflation continues to fall and so the tightening cycle is likely over with rates peaking at the current 13.75%. The CDI market is pricing in an easing cycle starting in March but that seems too aggressive in light of upside inflation risks from election-related fiscal spending.
Colombia reports July manufacturing production and retail sales Thursday. Manufacturing is expected at 9.0% y/y vs. 12.3% in June, while sales are expected at 12.3% y/y vs. 17.2% in June. July trade data will be reported Friday. The economy is slowing a bit but remains very robust even as inflation runs hot. At the last meeting July 29, the central bank hiked rates 150 bp to 9.0% and highlighted further tightening ahead. Next policy meeting is September 30 and another 150 bp hike seems likely after August CPI came in higher than expected at 10.84% y/y, the highest since April 1999 and further above the 2-4% target range. Swaps market is pricing in 275 bp of tightening over the next 6 months that would see the policy rate peak near 11.75%.
EUROPE/MIDDLE EAST/AFRICA
Czech Republic reports August CPI Monday. Headline is expected at 17.7% y/y vs. 17.5% in July. If so, it would be the highest since December 1993 and further above the 1-3% target range. At the last meeting August 4, the bank delivered a dovish surprise and left rates steady at 7.0% vs. an expected 25 bp hike. The vote was 5-2, with the dissents in favor of a 100 bp hike. It’s clear that the bank has tilted much more dovish under new Governor Michl. Indeed, minutes from that meeting show that most on the board now favor the baseline forecast that rates have peaked. Next policy meeting is September 29 and much will depend on August CPI as well as the koruna exchange rate.
Turkey reports July current account data Monday. A deficit of -$3.70 bln is expected vs. -$3.46 mln in June. July IP will be reported Tuesday and is expected at 8.2% y/y vs. 8.5% in June. August central government budget data will be reported Thursday. We expect the twin deficits to continue growing and harder to finance after the decision to cut rates 100 bp last month. Next policy meeting is September 22 and no change is expected. Even though the bank signaled no further easing as “the updated level of policy rate is adequate under the current outlook,” it seems there is now always some risk of a dovish surprise.
Israel reports Q2 current account and August trade data Wednesday. August CPI will be reported Thursday. Headline is expected at 5.0% y/y vs. 5.2% in July. If so, it would be the first deceleration since March but still well above the 1-3% target range. At the last meeting August 22, the bank delivered a hawkish surprise with a 75 bp hike to 2.0% vs. 50 bp expected. The swaps market is now pricing in a terminal rate near 3.0% vs. 2.25% right before that meeting. Next policy meeting is October 3 and a 50 bp hike seems likely with risks of another hawkish surprise. Updated macro forecasts will be released then. The last set of forecasts from the July meeting saw the policy rate at 2.75% in Q2 2023 but that rate path has likely steepened now.
Russia central bank meets Friday and is expected to cut rates 50 bp to 7.5%. However, market expectations are all over the place as over a quarter of the analysts polled by Bloomberg look for either no cut or cuts of 25 or 75 bp. CPI rose 14.3% y/y in August vs. 15.1% in July, decelerating for the fourth straight month to the lowest since February but still well above the 4% target. At the last policy meeting July 22, the bank delivered a dovish surprise and cut rates 150 bp to 8.0% vs. 50 bp expected. Governor Nabiullina said then that there was room for further easing in the medium-term, with the bank predicting that the policy rate will average between 7.4-8.0% from then until year-end.
ASIA
People’s Bank of China sets its 1-year MLF rate this week and is expected to keep it steady at 2.75%. The bank just cut the rate 10 bp August 15 and so another cut so soon seems unlikely. However, we see chances of a dovish surprise after August inflation data surprised to the downside. We continue to see downside risks to the economic outlook as policymakers are only adding modest stimulus. August IP and retail sales will be reported Friday. IP is expected to remain steady at 3.8% y/y, while sales are expected at 3.2% y/y vs. 2.7% in July.
India reports August CPI and July IP Monday. Inflation is expected at 6.90% y/y vs. 6.71% in July, while IP is expected at 4.2% y/y vs. 12.3% in June. WPI will be reported Wednesday and is expected at 12.95% y/y vs. 13.93% in July. At the last policy meeting August 5, the Reserve Bank of India hiked rates 50 bp to 5.40% vs. 35 bp expected. Governor Das said “Inflationary pressures are broad based and core inflation remains elevated,” noting that inflation will remain above the 2-6% target band for the current FY ending in March. He stressed that “It’s now basically a whatever-it-takes approach going into third year in succession.” Next policy meeting is September 30 and another 50 bp hike then seems likely, with risks of a smaller move if inflation continues to fall. The swaps market is pricing in 90 bp of tightening over the next 6 months that would see the policy rate peak near 6.3%.
