EM Preview for the week of August 15, 2021

August 15, 2021

EM FX is coming off a mixed week. The asset class grappled with the delta variant and signs of further slowing in China, but was underpinned by a softer dollar. We view last week’s dollar weakness as a corrective move and so EM FX is likely to come under pressure again. Much will also depend on U.S. yields, whose march upwards was halted on Friday. That too should resume, putting further pressure on EM.


Colombia reports Q2 GDP Tuesday. GDP is expected to contract -1.0% q/q vs. 2.9% growth in Q1. Next policy meeting is September 30 and the tightening cycle is expected to begin with a 25 bp hike to 2.0%. At the last meeting July 30, policy was unchanged but the vote was 5-2 with the dissents in favor of a 25 bp hike. After Peru’s surprise hike last week, Colombia stands out as the only major country in the region not to have tightened yet. It risks getting further behind the curve as July CPI inflation came in higher than expected at 3.97% y/y, near the top of the 2-4% target range. Bloomberg consensus sees 1 more hike in Q4, followed by 3 hikes in H1 and 2 hikes in H2 that would take the policy rate to 3.5% by end-2022.

Chile reports Q2 GDP Wednesday. GDP is expected to grow 0.7% q/q vs. 3.2% in Q1. Next policy meeting is August 31 and rates are expected to be kept steady at 0.75%. However, it will be a close call after July CPI inflation came in much higher than expected at 4.5% y/y, the highest since March 2016 and above the 2-4% target range. The central bank started the tightening cycle July 14 with a 25 bp hike to 0.75% but stressed that the move would be a gradual one. Minutes showed that the bank felt that market expectations for rate hikes were too aggressive. Of note, Bloomberg consensus sees a year-end policy rate of 1.25-1.50%, a mid-2022 rate of 2.0-2.25%, and an end-2022 rate of 2.75%.


Israel reports Q2 GDP Monday. Over the weekend, July CPI came in at 1.9% y/y vs. 1.8% expected. This is the highest since November 2013 and nearing the center of the 1-3% target range. Next policy meeting is August 23 and rates are expected to be kept steady at 0.10%. At the last meeting July 5, the bank cut its growth forecast for this year to 5.5% from 6.3% previously, but raised its growth forecast for next year to 6.0% from 5.0% previously. However, the bank warned then that the delta variant “poses some risk to the continued recovery of the economy.” For now, policy remains on hold.

South Africa reports July CPI and June retail sales Wednesday. Headline inflation is expected at 4.7% y/y vs. 4.9% in June. If so, it would be the second straight month of deceleration, the lowest since April, and nearing the center of the 3-6% target range. Next policy meeting is September 23 and rates are expected to be kept steady at 3.5%. At the last meeting July 22, the bank left policy steady but softened its stance about future tightening. Its model now suggest one hike by year-end vs. two previously, though we believe the bank will be hard-pressed to deliver any hikes this year. Indeed, Governor Kganyago warned that “Recent events in the country, their impact on vaccinations, a longer-than-expected lockdown, limited energy supply and policy uncertainty pose downside risks to growth.”

Poland reports July IP and PPI Thursday. Real retail sales will be reported Friday. Despite strong growth and high inflation, the central bank remains in dovish mode. CPI rose 5.0% in July, the highest since May 2011 and well above the 2-4% target range. Next policy meeting is September 8 and rates are expected to be kept steady at 0.10%. However, recent comments suggest the November 3 meeting is key, when new forecasts will be released. The most recent central bank forecasts from July see average inflation of 4.1% in 2021 (3.1% previously) and 3.3% in 2022 (2.8% previously). Bloomberg consensus sees small odds of a hike in Q4, with odds rising as we move through H1 2022.


China reports July retail sale and IP Monday. Sales are expected to rise 10.9% y/y vs. 12.1% in June, while IP is expected to rise 7.9% y/y vs. 8.3% in June. The economy is undoubtedly slowing in H2, especially as parts of the country lock down in an effort to contain the latest outbreak. New loans fell to CNY1.08 trln vs. CNY1.2 trln expected and CNY2.1 trln in June, while aggregate financing fell to CNY1.06 trln vs. CNY1.7 trln expected and CNY3.67 trln in June. This suggests the recent RRR cut has yet to make its way into the system. The PBOC may give some clues about future policy Monday, when CNY700 bln in one-year loans will mature. How much of that is rolled over and at what interest rate will be watched keenly.
Thailand reports Q2 GDP Monday. GDP is expected to contract -1.2% q/q vs. 0.2% in Q1. At the last policy meeting August 4, the Bank of Thailand delivered a dovish hold and cut its 2021 growth forecast for the second straight meeting to 0.7% from 1.8% previously. Of note, it was a 4-2 vote, the first split since May 2020 with the two dissents in favor of a 25 bp cut. Assistant Governor Titanun said “This round of the pandemic will affect the economy both this year and next year. The impact is greater than what we forecast, and the downside risk remains significant.” Next policy meeting is September 29 and rates are expected to be kept steady at 0.5%. CPI rose 0.45% in July, the lowest since March and below the 1-3% target range. We expect rates are likely to remain on hold through 2022. We see risks of further backdoor easing via macroprudential measures and after this last dissent, we cannot rule out another rate cut.
Indonesia reports July trade data Wednesday. Bank Indonesia meets Thursday and is expected to keep rates steady at 3.5%. CPI rose 1.33% in July, the lowest since the cycle low of 1.32% in August 2020 and well below the 2-4% target range. At the last meeting July 22, policy was kept steady and Governor Warjiyo said “pro-growth” policy will be maintained into next year and also emphasized the need to “maintain exchange rate stability” given heightened uncertainty in global markets. We don’t see any policy changes from Indonesia until we get more clarity on the spread of the delta variant, which will take a while. Bloomberg consensus sees steady rates through this year, with the first hike seen by mid-2022 and another hike by end-2022.


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