EM FX capitalized on broad-based dollar weakness last week. ZAR, BRL, and THB were the best performers, while ARS, HKD, and IDR were the laggards. U.S. data this week will be key for the dollar, as Fed officials made clear that tapering would begin if we got another strong jobs report this Friday. We do not think that Powell’s Jackson Hole speech was as dovish as markets perceived, and so we see limited downside for the greenback if the data come in strong this week.
Brazil reports central government budget data Monday. A primary deficit of -BRL30.1 bln is expected. Consolidated budget data will be reported Tuesday and a primary deficit of -BRL23.4 bln is expected. Q2 GDP and August trade data will be reported Wednesday. GDP is expected to grow 0.1% q/q vs. 1.2% in Q1. July IP will be reported Thursday and is expected to fall -0.7% m/m vs. a flat reading in June. The economy is slowing and yet inflation continues to rise. COPOM delivered a 100 bp hike to 5.25% at the August 4 meeting and promised one of similar magnitude at the next meeting September 22.
Chile reports July IP, unemployment, and retail sales data Tuesday. Later that day, the central bank meets and is expected to hike rates 50 bp to 1.25%. The bank started the tightening cycle with a 25 bp hike to 0.75% back on July 14. CPI rose 4.5% y/y in July, 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. Since then, however, Governor Marcel warned that another round of pension withdrawals would put upward pressure on inflation and long-term interest rates.
Banco de Mexico releases its quarterly inflation report Tuesday. Despite delivering two hikes in a row, it’s not clear how much more tightening the bank is willing to deliver. Minutes from the August 12 meeting showed one board member who voted to hike rates 25 bp to 4.5% said that no more hikes may be needed for now. The official added that future decisions would be data dependent and that the August hike didn’t imply an aggressive tightening cycle was under way. Since that vote was a split 3-2, this suggests the bank may remain on hold at the next policy meeting is September 30, depending on the data.
Colombia reports August CPI Saturday. Headline inflation is expected at 4.21% y/y vs. 3.97% in July. If so, it would be the highest since May 2017 and above the 2-4% target range. Next policy meeting is September 30 and a hike is becoming increasingly likely. At the last meeting July 30, the vote to stand pat was 5-2, with the dissents in favor of a 25 bp hike. It noted that “The members of the board considered that the space for continuing the current level of monetary stimulus is narrowing, given the behavior of inflation and its possible persistence, as well as the upward revision of growth forecasts.”
South Africa reports July budget data Monday. A deficit of -ZAR133.1 bln is expected. Money, credit, and trade data will be reported Tuesday. M3 is expected to rise only 0.10% y/y and private sector credit is expected to contract -0.7% y/y, both weakening from June. The economy remains weak and inflation is under control at 4.6% y/y, just above the 4.5% mid-point of the 3-6% target range. That along with structural unemployment issues means that SARB won’t be part of the first wave of tightening in EM. 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 rates steady but softened its stance about future tightening. Its model now suggests one hike by year-end vs. two previously, though we believe the bank will be hard-pressed to deliver any hikes at all this year. Instead, we expect the bank to gradually gear up for a potential hike early next year.
Turkey report July trade data Tuesday. A deficit of -$4.3 bln is expected. Q2 GDP will be reported Wednesday and is expected to grow 1.0% q/q vs. 1.7% in Q1. August CPI will be reported Friday. Headline inflation is expected at 18.73% y/y vs. 18.95% in July. If so, it would be the first deceleration since May but still well above the 3-7% target range. Next policy meeting is September 23 and rates are likely to remain steady at 19.0% despite pressure from President Erdogan to cut rates.
Poland reports August CPI Tuesday. Headline inflation is expected at 5.1% y/y vs. 5.0% in July. If so, it would be the highest since August 2001 and further above the 1.5-3.5% target range. Next policy meeting is September 8 and no change is expected. Minutes from the last meeting July 8 show that "The Council rejected the motion to raise the reference rate by 15 bp." A majority maintained the view that higher inflation was transitory and that “tightening of monetary conditions would not curb price growth in 2021, while it could halt economic recovery following a considerable economic downturn caused by the pandemic.”
Korea reports July IP Tuesday. It is expected flat m/m vs. 2.2% in June. August trade data will be reported Wednesday, with exports expected to rose 34.2% y/y vs. 29.6% in July and imports expected to rise 44.8% y/y vs. 38.1% in July. August CPI will be reported Thursday. Headline inflation is expected at 2.2% y/y vs. 2.6% in July. If so, it would be the lowest since March and move closer to the 2% target. The Bank of Korea started the tightening cycle last week with a 25 bp hike to 0.75%. Our best guess is that tightening will continue but at a gradual place, perhaps skipping the next meeting October 12. Note that one MPC member dissented in favor of a hold.
China reports official August PMI readings Tuesday. Manufacturing is expected at 50.1 vs. 50.4 in July and non-manufacturing is expected at 52.0 vs. 53.3 in July. If so, this would drag the composite lower from 52.4 in July. Caixin reports its manufacturing PMI Wednesday, which is expected at 50.1 vs. 50.3 in July. This will be followed by its services and composite PMIs Friday, with services expected at 52.0 vs. 54.9 in July. If so, the composite would be dragged lower from 53.1 in July. PBOC has signaled recently that it is willing to add more stimulus to boost the economy, which is slowing more than desired. We look for another RRR cut in the coming weeks if the data continue to soften.
Indonesia reports August CPI Wednesday. Headline inflation is expected at 1.60% y/y vs. 1.52% in July. If so, it would be the highest since May but still well below the 2-4% target range. Next policy meeting is and rates are expected to remain steady at 3.5%. At the last meeting July 22, it kept rates on hold and lowered its growth outlook and now expects GDP to rise in a range of 3.5-4.3% for the year, down from a forecast of 4.1-5.1% from before the latest virus wave. 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.