EM Preview for the week of August 22, 2021

August 22, 2021

EM FX is coming off a difficult week. ZAR, BRL, and MXN were the worst performers, losing 2-4%, while TRY and PHP were the only ones to eke out very small gains. Not only did the dollar reassert its strength, but risk-off sentiment picked up on concerns of slowing global growth amidst worsening virus numbers globally. We expect the dollar to remain bid this week ahead of the Jackson Hole Symposium, which should keep EM and other risk assets on the defensive.

AMERICAS

Mexico reports mid-August CPI Tuesday. Headline inflation is expected at 5.66% y/y vs. 5.75% in mid-July. If so, it would continue to drift lower but remain well above the 2-4% target range. Q2 current account data will be reported Wednesday. Banco de Mexico minutes will be released Thursday. At the August 12 meeting, the bank delivered the second straight 25 bp hike to 4.5%. However, it was a split vote 3-2 and so the minutes will be of interest. Also noteworthy is the changing makeup of the MPC. The two dissents were from Esquivel and Borja, two AMLO appointees who voted for steady rates. Governor Diaz de Leon’s terms will end and AMLO has chosen his Finance Minister Herrera to take over as Governor in January. As such, there are risks that the central bank will tilt more dovish next year. July trade data will be reported Friday.

Brazil reports mid-August IPCA inflation and July current account data Wednesday. Inflation is expected at 9.23% y/y vs. 8.59% in mid-July. If so, it would be the highest since May 2016 and further above the 2.25-5.25% target range. Next COPOM meeting is September 22. After increasing the pace of tightening to 100 bp at the last meeting, COPOM promised another hike of the same magnitude at the next meeting, which would take the policy rate up to 6.25%. The most recent central bank survey shows that economists now expect the policy rate at 7.5% for end-2021 and end-2022, both up from 7.25% previously.

EUROPE/MIDDLE EAST/AFRICA

Bank of Israel meets Monday and is expected to keep rates steady at 0.10%. July CPI came in at 1.9% y/y vs. 1.8% expected, the highest since November 2013 and nearing the center of the 1-3% target range. 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. Ahead of the decision, Israel reports July unemployment and June manufacturing production earlier that morning.

South Africa reports Q2 unemployment Tuesday. July PPI will be reported Thursday and is expected to rise 7.1% y/y vs. 7.7% in June. Last week, CPI came in at 4.6% y/y, just above the 4.5% mid-point of the 3-6% target range. As in many other economies, the overshoot is entirely due to headline factors such as food and energy, so won’t be a huge concern at this stage. South Africa’s structural unemployment and domestic demand issues mans that SARB won’t be part of the first wave of tightening. 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. Instead, we expect the bank to gradually gear up for a possible hike early next year.

National Bank of Hungary meets Tuesday and is expected to hike rates 30 bp to 1.5%. At the last meeting July 27, the bank delivered the second hike of the same magnitude and promised “firm steps on a monthly basis.” Inflation eased to 4.6% y/y in July from the 5.3% peak in June, but remain above the 2-4% target range. The bank said then that “The Monetary Council will continue the cycle of interest-rate hikes until the outlook for inflation stabilizes around the central bank target.”

National Bank of Poland releases its minutes Thursday. These are for the July 8 policy meeting. 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. The fact that PPI jumped a larger than expected 8.2% y/y in July suggests further upside for CPI ahead. 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. Bloomberg consensus sees small odds of a hike in Q4, with odds rising as we move through H1 2022.

ASIA

Korea reports trade data for the first twenty days of August Monday. Bank of Korea meets Thursday and is expected to keep rates steady at 0.50%. At the last meeting July 15, the bank kept rates on hold but there was one dissent in favor of a hike. The worsening virus numbers and the partial lockdown of Seoul haven’t discouraged the BOK officials from their intention to hike this year, but it could push back the timeline and we think this week is too soon for a move. Even with the supportive fiscal backdrop, we doubt officials would risk a policy mistake by hiking rates until the infection curve improves.

Singapore reports July CPI Monday. Headline inflation is expected to remain steady at 2.4% y/y, while core is expected at 1.0% y/y vs. 0.6% in June. While the MAS does not have an explicit inflation target, easing headline price pressures should allow it to maintain its accommodative policy at the semiannual meeting in October. Core inflation suggests no cause for concern, at least for now. July IP will be reported Thursday and is expected to fall -1.6% m/m vs. -3.0% in June.

Malaysia reports July CPI Wednesday. Headline inflation is expected at 3.0% y/y vs. 3.4% in June, While Bank Negara does not have an explicit inflation target, easing price pressures should allow it to maintain its accommodative stance through 2021, especially in light of the virus numbers and rising political uncertainty. At the last policy meeting July 8, the bank warned of “significant downside risks” that we feel might tip policymakers towards potentially easing in the next few meetings. Next meeting is September 9 and rates are expected to remain steady at 1.75%. July trade data will be reported Friday, with exports expected to rise 9.7% y/y vs.27.2% in June and imports expected to rise 20.2% y/y vs. 32.1% in June.

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