EM FX really took it on the chin last week as the dollar staged a broad-based rally based on the Fed’s hawkish hold. The high beta currencies were hit particularly hard, with the worst performers last week being ZAR, HUF, TRY, COP, and MXN. BRL was the best performer, helped by a hawkish COPOM. In this environment of receding global liquidity, we suspect that the EM currencies with more proactive central banks will outperform. Czech and Hungary are expected to start tightening cycles this week, joining Brazil and Russia. We suspect more and more are likely to follow in the coming weeks. However, we remain defensive on EM as we reach an inflection point in global liquidity.
Brazil central bank minutes will be released Tuesday. Brazil reports mid-June IPCA inflation and May current account data Friday. Headline inflation is expected at 8.16% y/y vs. 7.27% in mid-May. If so, this would be the highest since 2016 and further above the 2.25-5.25% target range. COPOM just delivered a 75 bp hike to 4.25% last week and flagged another hike of the same magnitude at the next meeting August 4. Markets are starting to price in the risk of a 100 bp hike , but we still think they stick to the current pace of 75 bp. The strong BRL appreciation and the frontloaded nature of the cycle should be enough to remove the sense of urgency necessary to scale up the size of hikes. However, it now looks like the terminal COPOM rate for the cycle will be 7.0% or something close to it, and the risk is now for a curve flattening, despite the significant fiscal uncertainty.
Banco de Mexico meets Thursday and is expected to keep rates steady at 4.0%. Ahead of the decision, Mexico reports mid-June CPI. Headline inflation is expected at 5.89% y/y vs. 5.80% in mid-May. If so, it would mean that inflation is accelerating again after a brief period of deceleration. Markets are no longer looking for rate cuts, but rather rate hikes. Bloomberg consensus sees no more easing now, with the first 25 bp hike seen as likely in Q4. The economic outlook has gotten more uncertain due to the recent increase in virus numbers, which led Mexico City to move up from the lowest Covid-19 alert level green to the higher level yellow.
Poland reports May IP and PPI Monday. IP is expected to fall -1.5% m/m while PPI is expected to rise 5.9% y/y. Real retail sales will be reported Tuesday and are expected to rise 6.4% m/m vs. -7.7% in April. The economy is recovering and price pressures are building, putting some pressure on the central bank to tighten. Last week, wages were reported up 10.1% y/y in May while employment was up 2.7% y/y. Next policy meeting is July 8. There is rising concerns about possible tapering after poor results for the second straight QE auction. If tapering is the intent, we think the bank needs to better communicate its policy stance. This is important since Governor Glapinski has said that QE would end first before any rate hikes are seen.
National Bank of Hungary meets Tuesday and is expected to hike the base rate 30 bp to 0.90%. However, the market is split. Of the 16 analysts polled by Bloomberg, 1 sees no hike, 3 see a 15 bp hike, 9 see a 30 bp hike, 2 see a 40 bp hike, and 1 sees a 50 bp hike. Monetary policy in Hungary is very opaque and so the wide range of expectations is not surprising. Of note, the bank snugged the 1-week deposit rate up by 15 bp to 0.75% back in September to lend some support to the forint and so it’s not totally clear which channel of tightening the bank will rely on going forward. However, officials have clearly flagged some form of tightening is coming this month.
South Africa reports June CPI Wednesday. Headline inflation is expected to pick up to 5.2% y/y from 4.4% in April. If so, it would be the highest since November 2018 and nearing the top of the 3-6% target range. However, core is expected to rise only 3.2% y/y vs. 3.0% in April. PPI will be reported Thursday and is expected to rise 7.4% y/y vs. 6.7% in April, which would point to further upside risks to CPI ahead. Next SARB meeting is July 22 and rates are expected to remain steady at 3.50%. The SARB’s models still suggest two hikes by year-end but we think this is unlikely given how weak the economy is.
Czech National Bank meets Wednesday and is expected to hike rates 25 bp to 0.50%. A couple of analysts look for steady rates but the bank has been pretty clear that it intends to hike sooner rather than later. Of note, the central bank’s model shows three hikes in 2021 but that seems too hawkish to us. Bloomberg consensus sees a year-end rate of 0.75%, rising to 1.5% by end-2022. Much will depend on the exchange rate. Central bank models suggest each 1 percentage point move in the currency is equivalent to a 25 bp move in the policy rate.
Korea reports trade data for the first 20 days of June Monday. Of note, exports rose 41% y/y in the first 10 days of June. There was a calendar effect, and so when adjusted for working days, average daily exports rose 32.6%, which is still quite impressive. During the first 10 days, auto exports jumped 136.9% and mobile phone exports rose 18.9%. Geographically, exports to China rose 14.2%, to the U.S. rose 63.4%, and to the EU rose 85%. We expect regional trade and activity to remain strong as we move into H2.
Taiwan reports May export orders Monday. Orders are expected to rise 42.2% y/y vs. 42.6% in April. May IP will be reported Tuesday and is expected to rise 12.85% y/y vs. 13.62% in April. The central bank just left rates steady at 1.125% last week. it raised its GDP growth forecast for this year to 5.08% vs. 4.53% previously and boosted its inflation forecast to 1.6% vs. 1.07% previously. CPI rose 2.48% y/y in May, the highest since February 2013 as the ongoing drought has led to higher food prices. 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 that it sees peaking in Q2.
Singapore reports June CPI Wednesday. Headline inflation is expected to remain steady at 2.1% y/y. The MAS does not have an explicit inflation target and so there is no need to response to what it likely views as a temporary spike in price pressures. That said, a lot can happen between now and the next policy meeting in October. May IP will be reported Friday and is expected to fall -0.9% m/m vs. 1.0% in April.
Bank of Thailand meets Wednesday and is expected to keep rates steady at 0.5%. At the last meeting May 5, the bank delivered a dovish hold as it warned that due to the most recent viral outbreak, the economy will recover more slowly than previously expected and may impact its 3% growth forecast for this year. Of note, the Finance Ministry last month cut its 2021 growth forecast to 2.3% from 2.8% previously due to the impact of the latest wave, especially on tourist arrivals. We suspect that policy is likely to remain on hold well into 2022.
Philippine central bank meets Thursday and is expected to keep rates steady at 2.0%. At the last meeting May 12, the bank delivered a dovish hold as it stated that “The Monetary Board believes that sustained support for domestic demand remains a priority for monetary policy, especially as risk aversion continues to hamper credit activity despite ample liquidity in the financial system.” Of note, the bank lowered its inflation forecast for 2021 to 3.9% vs. 4.2% previously but raised its 2022 forecast to 3.0% vs. 2.8% previously. Inflation was 4.5% y/y in May, down from the 4.7% peak in February but still above the 2-4% target range. The new forecasts suggest the bank sees no need to hike rates and supports our view that policy is likely to remain on hold well into 2022.