EM FX was mixed last week despite the dollar’s broad-based gains against the majors. We believe event risk this week favors further dollar gains and so EM FX is likely to remain vulnerable. These risks stem from U.S. data (May PPI and retail sales) and the FOMC decision, where a modestly hawkish hold is possible. The global growth outlook may also worsen a bit as China data is expected to show continued softening, also EM-negative.
Colombia reports April retail sales and manufacturing production Tuesday. Sales are expected to rise 70.0% y/y vs. 20.1% in March, while production is expected to rise 60.0% y/y vs. 20.7% in March. The economy is picking up and so with inflation on the rise, the market is looking ahead to the start of the tightening cycle. Next central bank policy meeting is June 28 and rates are expected to remain steady at 1.75%. However, Bloomberg consensus sees odds of a hike in Q3 and fully priced in by year-end. Another 25 bp hike to 2.25% is seen in Q1, followed by 50 bp in Q2 and 25 bp in Q3 that would take the policy rate to 3.0%.
Brazil COPOM meets Wednesday and is expected to hike rates 75 bp to 4.25%. Last week, May IPCA inflation came in higher than expected at 8.1% y/y, further above the 2.25-5.25% target range. Despite official comments about “partial normalization” of policy, the higher than expected inflation prints in recent weeks suggest the bank will eventually be forced to move toward a more aggressive tightening cycle. Of note, the CDI market is pricing in another 75 bp hike to 5.0% at the August 4 meeting. Bloomberg consensus sees another 100 bp of hikes in Q3, followed by 50 bp more in Q4 that would take the policy rates to 5.75% by year-end. More hikes are seen in 2022. Complicating matters is a severe drought that is likely to lead to considerable food price inflation ahead.
Turkey reports April current account data Monday. A deficit of -$2.2 bln is expected. The central bank meets Thursday and is expected to keep rates steady at 19.0%. May CPI inflation came in slightly lower than expected at 16.59% y/y, decelerating from 17.14% in April but still well above the 3-7% target range. On the other hand, PPI inflation accelerated to 38.33% y/y in May, the highest since November 2018 . Treasury and Finance Minister Lutfi Elvan said the increasing divergence between PPI and CPI is “quite disturbing.” He added that “Exchange rate pass-through effect and rising global commodity prices play an important role in the steep rise in producer prices.” In that regard, Elvan should feel better as the lira has been on a tear, up six straight days and 6% stronger than the record low recorded June 2.
Israel central bank minutes will be released Monday. The bank left policy unchanged at the May 31 meeting but sounded more upbeat. Israel also reports May trade and Q1 current account data Monday. May CPI data will be reported Tuesday. Headline inflation is expected to accelerate to 1.6% y/y from 0.8% in April. If so, it would be the highest since December 2013 and near the center of the 1-3% target range. The bank noted that "Inflation expectations for the coming year from all sources continued to increase, and are within the inflation target range." Next central bank policy meeting is July 5 and no change is expected then either. Q1 GDP will be reported Wednesday. Turning to politics, the Netanyahu era has drawn to a close as opposition parties cobbled together a razor thin majority in parliament. The first order of business should be to pass a budget, something that hasn’t been done in several years due to political instability.
South Africa reports April retail sales Thursday. Sales are expected to rise 1.5% m/m vs. -3.7% in March. Several structural reforms are worth mentioning. Last week, the government announced plans to allow private investors to build their own power plants with up to 100 megawatts of generating capacity without requiring a license. The new plants would still require permits to connect to the grid but officials say the process will be streamlined. Elsewhere, the government agreed to sell a majority stake in the state airline SAA to a private consortium but will maintain a minority stake. These are all positive developments for the longer-term outlook for the nation.
India reports May CPI and WPI Monday. Headline CPI inflation is expected to accelerate to 5.38% y/y from 4.29% in April, while WPI is expected to jump 13.40% y/y vs. 10.49% in April. If so, CPI inflation would move back near the top of the 2-6% target range even as WPI points to further upside risks. Next RBI meeting is August 6. On June 4, the bank kept rates steady but the bond purchase program that began back in April was increased by another INR 1.2 trln in Q3. It also announced additional liquidity provisions to some lockdown-impacted sectors. The bank said it would maintain its accommodative policy for as long as necessary to achieve growth on a durable basis. Consensus sees steady rates through 2021, with odds of a hike rising around mid-2022 and beyond. We are not convinced the easing cycle is over, especially with the ongoing reliance on QE. May trade data will be reported Tuesday.
Indonesia reports May trade data Tuesday. Exports are expected to rise 58.07% y/y vs. 51.94% in April, while imports are expected to rise 65.0% y/y vs. 29.93% in April. Bank Indonesia meets Thursday and is expected to keep rates steady at 3.5%. At the last meeting May 25, the bank seemed wary of changing policy. We don’t see a strong case for either a hike or cut in the near-term, especially after Governor Perry Warjiyo said last month that if any changes to the policy mix are needed, the bank will turn to liquidity instruments before tinkering with the policy rate. May CPI inflation came in slightly higher than expected at 1.68% y/y, the highest since December but still below the 2-4% target range.
China reports May retail sales and IP data Wednesday. Sales are expected to rise 14.0% y/y vs. 17.7% in April, while IP is expected to rise 9.2% y/y vs. 9.8% in April. Despite some modest slowing in the economy, PBOC Governor Yi Gang recently reaffirmed that the current level of accommodation is appropriate. The bank now expects CPI inflation to fall below 2% this year compared to the official target of about 3% and confirms our belief that we won’t get the signal for rate hikes anytime soon. As we suspected, one major area of focus at the G-7 was containing China’s global reach. President Biden reportedly urged the group to counter China’s growing influence by offering developing nations hundreds of billions of dollars in financing as an alternative to relying on China’s Belt and Road Initiative.
Singapore reports May trade data Thursday. NODX are expected to rise 16.8% y/y vs. 6.0% in April. The economy continues to benefit from stronger regional trade and growth. However, domestic activity should pick up as policymakers have started to ease virus restrictions that were put in place last month as infections fall. The Health Ministry last week announced that starting June 14, group sizes will be raised to five from two while operating capacities of attractions, events, and cruises will be increased to 50% from 25%. Although the economy is recovering, we believe the MAS will remain cautious and maintain its current accommodative policy at the next policy meeting in October.
Taiwan central bank meets Thursday and is expected to keep rates steady at 1.125%. CPI rose 2.48% y/y in May, the highest since February 2013. The central bank does not have an explicit inflation target and so it has the leeway to keep policy on hold for now on the belief that it is a transitory spike. Senior U.S. and Taiwan trade officials spoke last week as the two sides hope to jumpstart work on trade and investment deals. Earlier last week, Secretary of State Blinken said the U.S. would soon discuss “some kind of framework agreement” with Taiwan. This will of course ratchet up tensions with the mainland but it’s clear that the Biden administration’s focus is on rebuilding alliances with our old allies as a bulwark against China and Russia.