EM FX was mixed despite the dollar’s broad-based gains against the majors. MXN, COP, and BRL outperformed while CZK, PLN, and THB underperformed. We expect a hawkish hold from the Fed this week but virtually every other major central bank that’s meeting this week is expected to follow in the ECB’s footsteps and hike rates 25 bp. This includes the Bank of England, Swiss National Bank, Norges Bank, and Riksbank, with the one exception being the Bank of Japan. With global rates expected to be higher for longer, EM FX is likely to remain under pressure.
AMERICAS
Brazil reports July GDP Proxy Tuesday. Growth is expected at 0.9% y/y vs. 2.1% in June. COPOM meets Wednesday and is expected to cut rates 50 bp to 12.75%. Since the easing cycle started August 2, inflation has accelerated two straight months. This was due largely to low base effects in July and August and likely to persist in September, and so the central bank is looking through it. The swaps market is pricing in 150 bp of total easing over the next three months followed by another 100 bp over the subsequent three months.
Chile central bank releases its minutes Friday. At the September 5 meeting, the bank cut rates 75 bp to 9.5% and said “In the short term the MPR will continue on the path outlined in the previous meeting. The magnitude and timing of the process of MPR reductions will take into account the evolution of the macroeconomic scenario and its implications for the inflation trajectory.” At the previous meeting July 28, the bank started the easing cycle with a 100 bp cut to 10.25% and said the policy rate should end the year between 7.75-8.0%. With meetings October 26 and December 19, that implies two more 75 bp cuts, with risk of one 100 bp move instead.
Mexico reports mid-September CPI and July GDP proxy Friday. Headline inflation is expected at 4.48% y/y vs. 4.60% previously, while core is expected at 5.77% y/y vs. 5.96% previously. At the last meeting August 10, Banco de Mexico kept rates steady at 11.25% and said it was “necessary to maintain the reference rate at its current level for an extended period.” The minutes later showed that a rate cut was not even discussed. Next policy meeting is September 28 and rates are likely to be kept steady at 11.25%. The swaps market is pricing in steady rates over the next three months followed by 25 bp of easing over the subsequent three months. Elsewhere, GDP is expected at 3.95% y/y vs. 4.11% in June.
EUROPE/MIDDLE EAST/AFRICA
Poland reports August core CPI Monday. It is expected at 10.1% y/y vs. 10.6% in July. If so, it would be the lowest since August 2022 but still way too high. At the last policy meeting September 6, the bank delivered a hawkish surprise and cut rates 75 bp to 6.0% vs. 25 bp expected. After the zloty weakened significantly, a senior aide to Prime Minister Morawiecki said the currency had weakened beyond the “optimal” level, which he estimated was in the 4.40-4.60 range against the euro. He added that the central bank should consider the zloty impact of future policy decisions, an acknowledgment that the dovish surprise was ill-considered. The swaps market is pricing in 75 bp of total easing over the next three months followed by another 75 bp over the subsequent three months. PPI and IP will be reported Wednesday. PPI is expected at -2.9% y/y vs. -1.7% in July, while IP is expected at -1.7% y/y vs. -2.7% in July. Real retail sales will be reported Thursday and are expected to remain steady at -4.0% y/y.
South African reports August CPI and July retail sales Wednesday. Headline is expected to rise a tick to 4.8% y/y while core is expected to remain steady at 4.7% y/y. If so, it would be the first acceleration since March but would remain well within the 3-6% target range. Elsewhere, sales are expected at -1.0% y/y vs. -0.9% in June. South African Reserve Bank meets Thursday and is expected to keep rates steady at 8.25%. At the last policy meeting July 20, the bank delivered a dovish surprise and kept rates steady at 8.25% vs. an expected 25 bp hike to 8.5%. The vote was 3-2 with the dissents in favor of a hike. Governor Kganyago warned that “Risk to the inflation outlook are assessed to the upside” and added that “It is not the end of the hiking cycle, it depends on the data and risk. That is what it boils down to.” With inflation sharply back into the 3-6% target range, we believe the tightening cycle is over. That said, the swaps market is pricing in steady rates over the next twelve months followed by 50 bp of easing over the subsequent twelve months.
Turkey central bank meets Thursday and is expected to hike rates 500 bp to 30.0%. However, markets are all over the place. Of the 18 analysts polled by Bloomberg, 4 look for a 250 bp hike, 12 look doe 500, and 2 look for a 600 bp. At the last meeting August 24, the bank delivered a hawkish surprise and hiked rates 750 bp to 25.0% vs. 250 bp expected. The swaps market is pricing in a peak policy rate of 36.0% over the next six months followed by the start of an easing cycle over the subsequent six months. If so, this would be nowhere near enough tightening to get inflation back to target and stabilize the lira.
ASIA
Malaysia reports August trade data Tuesday. Exports are expected at -16.5% y/y vs. -13.1% in July, while imports are expected at -19.0% y/y vs. -15.9% in July. August CPI will be reported Friday, with headline expected to rise a tick to 2.1% y/y. If so, it would be the first acceleration since August 2022. Bank Negara does not have an explicit inflation target but low price pressures should allow it to keep rates on hold for now. At the last policy meeting September 7, the bank stayed on hold for the second straight meeting and said its policy stance will support growth. It added that the moderating trend in inflation would continue in H2. Next policy meeting is November 2 and no change is expected then.
China banks set their Loan Prime Rates Wednesday. The 1- and 5-year rates are both expected to be kept steady at 3.45% and 4.20%, respectively. After the PBOC cut reserve requirements last week, it’s clear that monetary stimulus remains ongoing and we look for further easing in Q4. Recent data suggest the economy is starting to respond to stimulus but it’s way too early to sound the all clear.
Taiwan reports August export orders Wednesday. Orders are expected at -10.0% y/y vs. -12.0% in July. The central bank meets Thursday and is expected to keep rates steady at 1.875%. At the last meeting June 15, This was the first pause since 2021 but Governor Yang would not rule out further hikes, He stressed that monetary policy would continue to be data-dependent and that inflation is still the main factor for monetary policy and not economic growth. The central bank does not have an explicit inflation target and so we believe the tightening cycle has ended. The market is pricing in steady rates over the next three years. August IP will be reported Saturday and is expected at -12.15% y/y vs. -15.20% in July.
Korea reports trade data for the first twenty days of September Thursday. For the first ten days of the month, exports came in at -7.9% y/y and imports came in at -11.3%. Adjusting for the number of working days, daily average exports came in weaker at -14.5% y/y. Of note, exports to the U.S. rose 2.3% and those to China fell -17.7%. The key JPY/KRW cross is trading below 9 and has hurt Korean competitiveness.
Bank Indonesia meets Thursday and is expected to keep rates steady at 5.75%. At the last policy meeting August 24, it also kept rates steady at 5.75% and Governor Warjiyo said that the policy focus remains on maintaining rupiah stability. He added that Bank Indonesia won’t hike rates further if the Fed hikes but will continue to allow short-term bond yields to rise to support the rupiah, noting “What matters is not the policy rate but government bond yields. Inflows respond to government bond yields, that’s why we do Operation Twist.” The bank also announced it would issue Bank Indonesia Rupiah Securities to attract foreign inflows. The paper will have maturities of 6, 9, and 12-months and the bank will set attractive rates with variable rate tenders. Bloomberg consensus sees the start of an easing cycle in Q1 with a 25 bp cur followed by 25 bp cuts in Q2 and Q3. Even this may be too aggressive; with the Fed expected to maintain tight policy, we believe that Bank Indonesia has very little cushion to cut rates without weighing on the rupiah.
Philippine central bank meets Thursday and is expected to keep rates steady at 6.25%. At the last policy meeting August 17, it also kept rates steady at 6.25% and new Governor Remolona stressed that the bank is “ready to tighten” if needed, ruled out a rate cut at next month’s meeting, and said that it is unlikely to reduce reserve requirements while it’s still in tightening mode. The bank raised its inflation forecast for 2023 to 5.6% vs. 5.4% previously, for 2024 to 3.3% vs. 2.9% previously, and for 2025 to 3.4% vs. 3.2% previously. The swaps market is pricing in the start of an easing cycle with a 25 bp cut over the next three months, which seems too soon given the hawkish bias at the last meeting.
