Frontier currencies were mostly weaker last week as the dollar mounted a broad-based recovery. UAH, UYU and LKR were able to post modest gains against USD, while HRK, RSD, and GHC underperformed. The strong U.S. economy, hawkish Fed, and tariff threats all conspired to push the dollar higher and those drivers are set to continue this week. Most importantly, the U.S. is pushing ahead with 25% tariffs on Canada and Mexico along with 10% tariffs on China, which should help keep Frontier and other risk assets under pressure.
EUROPE/MIDDLE EAST/AFRICA
Kazakhstan reports January CPI data Monday. Headline is expected to remain steady at 8.6% y/y. If so, it would remain near the cycle low of 8.3% in September but well above the 5% target. The central bank began its tightening cycle with a 100 bp hike to 15.25% in November 2024 but then kept policy steady at its January meeting. Next meeting is March 7 and another hold seems likely if price pressures remain contained.
Sedlabanki meets Wednesday. The bank started the easing cycle October 2 with a 25 bp cut to 9.0% and followed up with a 50 bp cut to 8.5% November 20. However, the bank warned that “persistent inflation and inflation expectations above target call for caution.” Elsewhere, Governor Jonsson sounded cautious as he said “Hopefully we will be able to do it in rather small steps.” Last week, CPI inflation slowed to 4.6% y/y vs. 4.8% in both November and December. This is the lowest since October 2021 and nearing the 1-4% target range. As such, we look for a 25 bp cut this week, with some risks of a dovish surprise.
Kenya central bank meets Wednesday and is expected to cut rates 50 bp to 10.75%. The bank began its easing cycle with a 25 bp cut to 12.75% back in August 2024. It followed up with two dovish surprises, a 75 bp cut in October and another 75 bp cut in December, to bring the policy rate down to 11.25%. After the December cut, Governor Thugge noted that "The Monetary Policy Committee noted that overall inflation was expected to remain below the midpoint of the target range in the near term, supported by low fuel inflation, stable food inflation, and exchange rate stability." Last week, January CPI was reported at 3.3% y/y vs. 2.8% expected and 3.0% in December and remains well below the midpoint of the 2.5-7.5% target range. The modest acceleration should keep the bank cautious and cut by 50 bp vs. 75 bp at the last meeting.
ASIA
Pakistan reports January CPI data Monday. Headline is expected at 2.8% y/y vs. 4.1% in December. If so, it would be the lowest reading in data going back to 2017 and would move further below the 6% target. The central bank just cut rates 100 bp to 12.0% last week and Governor Ahmad said that falling inflation means “we have ample room to cut rates.” He added that “Our real interest rates in the short term are quite positive and that is providing us with flexibility for rate cuts.” Next policy meeting is March 10 and another 100 bp cut to 11.0% seems likely if inflation remains low, with risks of a dovish surprise.
Vietnam reports January CPI data Thursday. Headline is expected at 3.10% y/y vs. 2.94% in December. If so, it would accelerate for the second straight month to the highest since August but remain well below the 4.5% target. The central bank has kept the policy rate at 4.5% since the last 50 bp cut in June 2023. However, the bank continues to rely on non-market policies such as deposit and lending rate caps and credit growth ceilings. This has led the IMF to push for further modernization of the monetary policy framework, as well as great flexibility in the exchange rate.