EM Preview for the Week of September 24, 2023

September 24, 2023

EM FX was mixed last week. ZAR, PLN, and CZK outperformed while HUF, BRL, and COP underperformed. Some renewed optimism about China helped some of the growth-sensitive currencies gain but we remain skeptical that this bounce in mainland data can be sustained. Furthermore, the main message that emerged from last two week’s spate of DM central bank meetings is that global liquidity will continue to tighten and remain tight well into 2024. More and more EM central banks are cutting rates, which will put additional pressure on EM FX.


Brazil reports August current account and FDI data Monday. Mid-September IPCA inflation will be reported Tuesday and is expected at 5.02% y/y vs. 4.24% in mid-August. If so, it would be the highest since mid-March and above the 1.75-4.75% target range. However, this is due in large part to low base effects and should wear off in Q4. The central bank releases its minutes Tuesday. At last week’s meeting, the bank cut rates 50 bp as expected and signaled a steady pace of easing ahead. Next meeting is November 1 and another 50 bp cut to 12.25% is expected. The bank then releases its quarterly inflation report Thursday. August central government budget data will also be reported Thursday and a primary deficit of -BRL26.2 bln is expected vs. -BRL35.9 bln in July. Consolidated budget data will be reported Friday and a primary deficit of -BRL25.5 bln is expected vs. -BRL35.8 bln in July.

Mexico reports August trade data Wednesday. Banco de Mexico meets Thursday and is expected to keep rates steady at 11.25%. At the last meeting August 10, the bank kept rates steady 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. The swaps market is pricing in steady rates over the next three months followed by 25 bp of easing over the subsequent three months.

Chile reports August IP and retail sales Friday. IP is expected at -0.5% y/y vs. -1.7% in July, while sales are expected at -8.9% y/y vs. -10.1% in July. With the economy slipping into recession, the bank is likely to continue its aggressive easing cycle. Minutes to the September 6 meeting show that the bank discussed a cut of 50, 75 or 100 bp before unanimously settling on a 75 bp cut to 9.5%. It note that “This option, moreover, had the advantage that it reflected most market expectations, a point to bear in mind given the high sensitivity that the MPR expectations and the exchange rate had shown to developments related to interest rate differentials.” The swaps market sees a year-end policy rate of 8.5% vs. central bank forward guidance of 7.75-8.0%.

Colombia central bank meets Friday and is expected to keep rates steady at 13.25%. At the last policy meeting July 31, the bank delivered a hawkish hold as minutes showed it “acknowledged that the fight against inflation is not over. In this regard, they agreed on the need to maintain the current restrictive stance of monetary policy, until they see convincing signs of the convergence of inflation toward its target.” It's worth noting that Colombia was the last in Latin American to stop hiking and so will likely be the last to start easing. Swaps market is pricing in 50 bp of easing over the next three months, which seems too much given the bank’s hawkish stance.


National Bank of Hungary meets Tuesday. It is expected to keep the base rate steady at 13.0% whilst cutting the 1-day deposit rate 100 bp to 13.0%. With the two rates united, the bank is likely to cut monthly going forward and the swaps market is pricing in 225 bp of easing over the next six months followed by another 125 bp over the subsequent three months. Such an aggressive pace of easing would surely keep the forint under pressure. Ahead of the decision, Finance Minister Varga speaks.

Czech National Bank meets Wednesday and is expected to keep rates steady at 7.0%. Last week, Governor Michl pushed back against rate cut bets and said “Inflation is still extremely high, which is why we should all forget about cutting interest rates any time soon. Don’t expect at all that we will cut in September, October or something like that. Just forget about rate cuts. We will keep restrictive monetary policy until we are certain that inflation will be around 2% not only in the first half of 2024 but also later.” Michl is trying to differentiate the bank from its counterparts in Hungary and Poland, both of which have started aggressive easing cycles even as inflation remains high and above target. Despite Michl’s comments, the swaps market is still pricing in 50 bp of easing over the next three months, followed by another 50 bp over the subsequent three months..

Poland reports September CPI Friday. Headline is expected at 8.5% y/y vs. 10.1% in August. If so, it would be the lowest since February 2022 but still well above the 1.5-3.5% target range. At the last policy meeting September 6, the bank delivered a dovish surprise and cut rates 75 bp to 6.0% vs. 25 bp expected. After the zloty subsequently 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. Next meeting is October 4 and we think the size of the cut will depend in large part on how the zloty is trading. The swaps market is pricing in 50 bp of total easing over the next three months followed by another 50 bp over the subsequent three months.


Singapore reports August CPI Monday. Headline is expected to fall a tick to 4.0% y/y while core is expected to fall three ticks to 3.5% y/y. If so, headline would be the lowest since January 2022. While the MAS does not have an explicit inflation target, falling price pressures should allow it to keep policy on hold at the October meeting, with a possibility of easing at the April meeting. IP will be reported Tuesday and is expected at -3.6% y/y vs. -0.9% in July.

Bank of Thailand meets Wednesday and is expected to hike rates 25 bp to 2.5%. However, the market is split. Of the 13 analysts polled by Bloomberg, 5 see steady rates and 8 see a 25 bp hike. At the last meeting August 2, the bank hiked rates 25 bp to 2.25% but signaled that the tightening cycle was nearing an end as it dropped its reference to the need for “gradual and measured” rate hikes going forward. Assistant Governor Piti also noted that overall financial conditions have turned less accommodative. After the hike, the swaps market is pricing in steady rates over the next year.

Official China PMI readings will be reported Saturday. Manufacturing is expected at 50.2 vs. 49.7 in August, while non-manufacturing is expected at 51.5 vs. 51.0 in August. If so, the composite would rise for the second straight month. Caixin reports its PMI readings Sunday evening. We do not think this modest bounce in the recent data can be sustained when global growth is slowing and domestic stimulus measures have so far been very mild.

Korea reports September trade data Saturday. Trade data through the first twenty days of the month offered a glimmer of hope, with exports rising 9.8% y/y and imports falling -1.5% y/y. Exports to China fell -9% y/y while those to the U.S. rose 30.5% y/y. However, adjusting for the number of working days, average daily exports came in at -7.9% y/y. While recent data suggest that regional trade and activity are starting to bottom out, we do not expect a sharp rebound given slowing global growth.

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