EM Preview for the week of July 25, 2021

Here's a look at the main drivers in Emerging Markets this week.

EM FX came under pressure last week as dollar strength picked up. RUB, INR, and IDR were able to eke out small gains but the high beta currencies took a big hit, with ZAR, BRL, and COP all down 2-3% on the week. With the Fed expected to deliver another hawkish hold this week, we think the dollar will continue to strengthen.

AMERICAS
Mexico reports June trade data Tuesday. Q2 GDP will be reported Friday., with growth expected at 1.8% q/q vs. 0.8% in Q1. Viral outbreaks in Cancun and Los Cabos are driving a third wave of infections that will likely have significant impact on H2 growth. Indeed, Mexico City announced Friday that due to rising numbers, it will drop back down to “orange status” that reduces the permitted activities for its populace. With fiscal policy seen remaining tight, the burden will fall on monetary policy to provide stimulus. This suggests Banco de Mexico will keep rates on hold for now after it started a tightening cycle June 24 with a surprise 25 bp hike to 4.25%. Next policy meeting is August 12 and no change is expected then.
Brazil reports June current account and FDI data Tuesday. Central government budget data will be reported Thursday, where a primary deficit of -BRL74.6 bln is expected. Consolidated budget data will be reported Friday, where a primary deficit of -BRL70.8 bln is expected. Deficits continue to improve, albeit modestly, and hopes for major fiscal reforms have been dashed as President Bolsonaro starts to gear up for elections next year. His falling popularity has led Bolsonaro to reach out to key centrist lawmakers to maintain support in Congress.
Chile reports June unemployment, retail sales, and IP Friday. With the economy on the mend, the central bank started a tightening cycle July 14 with a 25 bp hike to 0.75%. However, the forward guidance suggest the pace of hikes will be modest as the bank saw “gradual withdrawal” of monetary stimulus and added that the policy rate “will be below its neutral value throughout the two-year policy horizon.” Next policy meeting is August 31 and no change is expected then. CPI rose 3.8% y/y in June, lower than the consensus 4.1% but still the highest since February 2020 and nearing the top of the 2-4% target range.
Colombia central bank meets Friday and is expected to keep rates steady at 1.75%. CPI rose 3.63% y/y in June, the highest since March 2020 and nearing the top of the 2-4% target range. At the last meeting June 28, the bank kept rates steady and Governor Villar said inflation expectations remain anchored and that the spike in inflation is likely temporary. The bank also raised its growth forecast for this year to 6.5% from 6.0% previously. Bloomberg consensus sees the first hike coming in H2, followed by quarterly hikes next year that take the policy rate to 3.0% by end-2022.

EUROPE/MIDDLE EAST/AFRICA
National Bank of Hungary meets Tuesday and is expected to hike rates 15 bp to 1.05%. However, the market is split. Of the 14 analysts polled by Bloomberg, 8 see a 15 bp hike, 1 sees 20 bp hike, and 5 see a 30 bp hike. The bank started a tightening cycle June 22 with a 30 bp hike to 0.90%. CPI rose 5.3% y/y in June, the highest since October 2021 and further above the 2-4% target range. Meanwhile, tensions with the EU remain high as Prime Minister Orban continues to promote anti-LGBTQ sentiment for political gains ahead of elections early next year.
South Africa reports June money, credit, and PPI data Thursday. M3 and credit growth are expected to remain sluggish at 2.0% y/y and 0.4% y/y, respectively, while PPI is expected to slow a tick to 7.3% y/y. Yet SARB said last week that its models still show a rate hike in Q4 followed by one hike each quarter in 2022. This seems way too hawkish in light of high unemployment, pandemic risks, and lingering social tensions. Next policy meeting is September 23. If current negative trends persist, we suspect the bank will tilt less hawkish then. Trade budget data will be reported Friday.
Czech Republic reports Q2 GDP Friday. Growth is expected at 2.0% q/q vs. -0.3% in Q1. The recovery continues even as price pressures appear to be receding, with inflation falling two straight months to 2.8% y/y in June. This is back in the 1-3% target range after peaking at 3.1% in April. The central bank started a tightening cycle June 23 with a 25 bp hike to 0.5%. While it flagged further hikes in H2, Governor Rusnok said the moves would be gradual. Indeed, recent data suggest an aggressive cycle is unlikely right now. Next policy meeting is August 5 and no change is expected.
Poland reports July CPI Friday. Headline inflation is expected to accelerate to 4.7% y/y vs. 4.4% in June. If so, this would match the cycle high from May and move further above the 1.5-3.5% target range. Despite rising price pressures, the central bank just delivered a dovish hold July 8. Before the decision, Governor Glapinski had said in an interview that the bank will act if inflation turns out to be driven by demand-side factors. However, at a press conference after the decision, Glapinski said inflation is being driven by supply shocks noting “There are no local effects generating any excessive inflation and there are no signs of any overheating in the economy, which is only at the start of its recovery path.” Next policy meeting is September8 and rates are expected to remain on hold at 0.10% given Glapinski’s extremely dovish tone.

ASIA
Hong Kong reports June trade data Monday. Exports are expected to rise 24.6% y/y vs. 24.0% in May, while imports are expected to rise 26.1% y/y vs. 26.5% in May. It then reports Q2 GDP Friday, with growth expected to remain steady at 7.9% y/y.
Korea reports Q2 GDP Tuesday. Growth is expected at 0.9% q/q vs. 1.7% in Q1. June IP will be reported Friday and is expected at 0.8% m/m vs. -0.7% in May. July trade data will be reported Sunday local time. Exports are expected to rise 30.9% y/y vs. 39.8% in June, while imports are expected to rise 43.9% y/y vs. 40.7% in June.
Taiwan reports Q2 GDP Friday. Growth is expected at 6.15% y/y vs. 8.92% in Q1.
China reports official July PMI Saturday local time. Manufacturing is expected to fall a tick to 50.8. Markets should be prepared for softer mainland data in H2, as the surprise PBOC RRR cut suggests the economy is slowing more than desired.

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