EM Preview for the week of September 6, 2021

September 06, 2021

EM FX is coming off another strong week, taking advantage of continued broad-based dollar weakness as U.S. data disappointed. ZAR, PLN, and CLP were the best performers last week while ARS, PEN, and THB were the worst. With no major U.S. data releases this week, we expect the dollar to remain under pressure as the weak jobs report has many analysts looking for the Fed to delay tapering. We are not yet convinced but we must await more data.

AMERICAS


Chile reports August trade and July wage data Tuesday. CPI will be reported Wednesday. Headline inflation is expected at 4.7% y/y vs. 4.5% in July. If so, it would be the highest since February 2016 and further above the 2-4% target range. No wonder the central bank just delivered a 75 bp hike to 1.5% last week. Next policy meeting is October 13 and another hike is expected then. However, Governor Marcel stressed that “We are not slamming on the brakes. We will continue to have expansive monetary policy through the middle of next year because we are going to be below the neutral rate.” 


Mexico reports August CPI Thursday. Headline inflation is expected at 5.60% y/y vs. 5.81% in July. If so, it would be the lowest since March but still well above the 2-4% target range. Banco de Mexico boosted its 2021 growth forecast to 6.2% vs. 6.0% previously in its quarterly inflation report but maintained both its year-end inflation forecast at 5.7% and its end-2022 forecast at 3.4%. Governor Diaz de Leon said the bank saw recent inflation as “predominantly transitory” but acknowledged the “uncertain” inflation outlook. Next policy meeting is September 30 and a pause then seems likely as the bank waits to assess the situation better in Q4. July IP will be reported Friday and is expected to rise 0.3% m/m vs. -0.5% in June.


Brazil reports August IPCA inflation Thursday. Headline inflation is expected at 9.50% y/y vs. 8.99% in July. If so, it would be the highest since February 2016 and further above the 2.25-5.25% target range. COPOM delivered a 100 bp hike to 5.25% August 4, and promised a hike of similar magnitude at the next meeting September 22. July retail sales will be reported Friday and are expected to rise 0.6% m/m vs. -1.7% in June.
Peru central bank meets Thursday and is expected to hike rates 25 bp to 0.75%. The bank started the tightening cycle with a 25 bp hike to 0.50% August 12. However, it said that expansionary policy is still needed as it sees the economy as running “below potential.” That said, CPI rose a whopping 4.95% in August vs. 3.81% in July, the highest since February 2009 and further above the 1-3% target range. The bank sees this spike as temporary, with inflation to return to target within 12 months. However, it is likely to deliver another hike this week to establish its credibility.

EUROPE/MIDDLE EAST/AFRICA


Czech Republic reports July construction, industrial output, and trade data Monday. Retail sales data will be reported Tuesday and are expected to rise 3.6% y/y vs. 9.7% in June. August CPI will be reported Friday. Headline inflation is expected at 3.6% y/y vs. 3.4% in July. If so, it would be the highest since February 2020 and further above the 1-3% target range. The bank has hiked rates by 25 bp for two straight meetings. Next policy meeting is September 30 and another 25 bp hike to 1.0% is likely.


South Africa reports Q2 GDP data Tuesday. Growth is expected to slow to 2.0% annualized vs. 4.6% in Q1. Q2 current account and July manufacturing production will be reported Thursday, with a surplus equal to 6.7% of GDP and production up 2.7% y/y expected. With the economy sluggish and inflation under control, we believe the SARB is on hold for the rest of this year. At the last meeting July 22, the bank delivered a dovish hold as its model showed only one hike this year instead of two. That said, we think even one hike in 2021 is unlikely and believe that is a 2022 story. Next policy meeting is September 23 and rates are expected to remain steady at 3.5%.


Hungary reports July IP Tuesday. It is expected to rise 11.5% y/y WDA vs. 18.6% in June. July trade and August CPI data will be reported Wednesday. Headline inflation is expected at 4.7% y/y vs. 4.6% in July. If so, it would move further above the 2-4% target range. Central bank minutes will also be released that day. The bank has hiked the base rate by 30 bp for three straight meetings. Next policy meeting is September 21 and another 30 bp hike to 1.8% is likely.


National Bank of Poland meets Wednesday and is expected to keep rates steady at 0.10%. However, we see potential for a hawkish surprise. If nothing else, the language should be sufficiently hawkish in order to set the table for a possible hike at the next meetings on October 6 or November 3. Minutes from the last meeting July 8 were dovish, with the majority voting to reject a motion to hike rates 15 bp as they saw inflation returning next year to around 3.5%. Since then, however, prices pressures have continued to pick up. CPI rose a higher than expected 5.4% y/y in August, the highest since 2001 and further above the 1.5-3.5% target range. 

 
Russia reports August CPI Wednesday. Headline inflation is expected at 6.7% y/y vs. 6.5% in July. If so, it would be the highest since August 2016 and further above the 4% target. The central bank meets Friday and is expected to hike rates 50 bp to 7.0%. However, the market is split. Of the 20 analysts polled by Bloomberg, 1 sees no hike, 8 see a 25 bp hike, and 11 see a 50 bp hike. The bank delivered a 100 bp hike to 6.5% at the last meeting July 23 and said it was too early to say if that was the last one. July trade and Q2 GDP data will also be reported Friday, with growth expected to remain steady at 10.3% y/y.

 

ASIA


Thailand reports August CPI Monday. Headline inflation is expected at 0.30% y/y vs. 0.45% in July. If so, it would be the lowest since March and further below the 1-3% target range. Next Bank of Thailand meeting is September 29. At the last meeting August 4, it kept rates steady at 0.5%. 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.” We expect rates are likely to remain on hold through 2022, with risks of further backdoor easing via macroprudential measures. After this dissent, however, we cannot rule out another rate cut. 


Philippines reports August CPI Tuesday. Headline inflation is expected at 4.4% y/y vs. 4.0% in July. If so, it would be the highest since May and back above the 2-4% target range. Next central bank policy meeting is September 23. At the last meeting August 12, Governor Diokno warned that “The reimposition of quarantine measures to arrest the recent wave of Covid-19 infections could pose a risk to the ongoing economic recovery.” He stressed that the outlook inflation and the economy “warrant keeping monetary settings in place,” adding that further delays to the recovery could keep rates on hold longer or prompt the bank to reach deeper into their policy toolkit. July trade will be reported Thursday.


China reports August trade and foreign reserves data Tuesday. Exports are expected to rise 17.1% y/y vs. 19.3% in July, while imports are expected to rise 26.1% y/y vs. 28.1% in July. Reserves are expected to remain pretty much steady at $3.23 trln. CPI and PPI will be reported Thursday. Both are expected to remain steady at 1.0% y/y and 9.0% y/y, respectively. Money and loan data will be released either late this week or early next week. New loans are expected at CNY1.375 trln vs. CNY1.08 trln in July, while aggregate financing is expected at CNY2.80 trln vs. CNY1.06 trln in July. We fully expect another RRR cut in the coming weeks if loan growth remains sluggish.
Taiwan reports CPI and August trade data Tuesday. Headline inflation is expected at 1.90% vs. 1.95% in July. While the central bank does not have an explicit inflation target, low price pressures should allow it to keep rates on hold at 1.125% at the next policy meeting September 23. Exports are expected to rise 23.3% y/y vs. 34.7% in July, while imports are expected to rise 30.3% y/y vs. 41.0% in July.

Bank Negara Malaysia meets Thursday and is expected to keep rates steady at 1.75%. At the last policy meeting July 8, the bank warned of “significant downside risks” ahead. For now, we expect fiscal stimulus to carry much of the burden as the country struggles with the pandemic. However, we cannot rule out a potential rate cut later this year if the outlook deteriorates. July IP will be reported Friday and is expected to fall -0.2% y/y vs. 1.4% growth in June.

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