Frontier currencies were mixed last week despite broad dollar losses. KZT, RSD, and UYU outperformed while GHC, CRC, and LKR underperformed. The dollar was hurt last week by stories of delayed tariffs but that should reverse this week now that the tariff wars are upon us. President Trump over the weekend announced travel bans and immediate 25% tariffs on Colombian imports in retaliation for Colombia refusing to accept two U.S. military planes deporting 160 Colombians. Colombia President Petro announced 25% retaliatory tariffs on all U.S. goods. Of note, Mexico also announced over the weekend that it would not allow a U.S. military plane carrying deportees to land. In this tense global environment, frontier currencies should come under greater pressure.
EUROPE/MIDDLE EAST/AFRICA
Iceland reports January CPI data Thursday. CPI has been declining steadily to 4.8% y/y in both November and December, the lowest since November 2021 and nearing the 1-4% target range. Sedlabanki started the easing cycle October2 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.” Next policy meeting is February 5 and another cut is likely. Whether it’s a 25 or 50 bp cut will depend on the CPI data.
Kenya reports January CPI data Friday. Inflation picked up slightly to 3.0% y/y in December but remains near the bottom of the 2.5-7.5% target range. The central 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%. Next policy meeting is February 5 and another 75 bp cut is possible if inflation remains low.
ASIA
State Bank of Pakistan meets Monday and is expected to cut rates 100 bp to 12.0%. However, a handful of analysts polled by Bloomberg look for a larger 200 bp cut to 11.0%. The bank started the easing cycle with a 150 bp cut to 20.5% back in June 2024. It has cut rates at every meeting since then as inflation has fallen to 4.07% y/y in December, the lowest since April 2018 and down from the 37.97% peak in May 2023. We see risks of a dovish surprise.
Sri Lanka central bank meets Wednesday and is expected to keep rates steady at 8.0%. However, a handful of analysts polled by Bloomberg look for a 25 bp cut to 7.75%. At the last meeting November 27, the central bank introduced a new single policy rate at 8.0% to “signal and operationalize its monetary policy stance.” It replaced the old dual-rate system and the bank said the effective easing would be around 50 bp. It added that the switch is meant to “ensure that inflation treads towards the inflation target of 5%, while supporting the economy to reach its full capacity.” With deflation in play, we see risks of a dovish surprise this week.