Most EM currencies were up last week, taking advantage of broad-based dollar weakness. The best performers were MXN, BRL, and CLP as the benefited from hawkish central banks. It appears that those banks that are getting ahead of the Fed are most likely to see their currencies outperform due to the higher carry. This week’s US data and Fed comments will be a true test for EM FX to see if they can sustain their gains in the face of a potentially resurgent dollar. Stay tuned.
Mexico reports May trade data Monday. A surplus of $1.35 mln is expected. If so the 12-month surplus would rise to $38.5 bln, the highest on record. The IMF projects a current account surplus equal to 5% of GDP this year, which would be very peso-supportive. What’s also supportive is the hawkish central bank, which surprised markets with a 25 bp hike to 4.25% last week. We do not expect a Brazil-style front-loaded tightening cycle, but we have to acknowledge that further hikes are likely in H2.
Colombia central bank meets Monday and is expected to keep rates steady at 1.75%. Minutes will be released Wednesday. June CPI will be reported Saturday, with headline inflation expected at 3.73% y/y vs. 3.30% in May. If so, it would be the highest since March 2020 and nearing the top of the 2-4% target range. Bloomberg consensus sees the tightening cycle beginning in Q3 with a 25 bp hike to 2.0%. Like Mexico, we do not expect an aggressive tightening cycle in Colombia like we saw in Brazil.
Brazil reports May PPI and June IGPM inflation data Tuesday. 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. After the hawkish minutes, markets will be looking for signs that price pressures are abating. May consolidated budget data will be reported Wednesday, where a primary deficit of -BRL20.3 bln is expected. June trade data will be reported Thursday. May IP will be reported Friday.
Chile reports May retail sales and manufacturing production Wednesday. The economy continues to recover and so the central bank has tilted more hawkish. Minutes from the June 8 meeting show the MPC discussed the option of a 25-75 bp hike. This means that it’s now just a matter of waiting for the updated macro outlook for the bank to decide on how to calibrate communication and the cycle itself. Next meeting is July 14 and it is very much a live one in terms of potential tightening.
Turkey reports May trade data Wednesday. A deficit of -$4.1 bln is expected. If so, the 12-month total would rise to -$47.1 bln. Both exports and imports have surged y/y the past two months due to base effects, which should also be seen in May. The IMF projects a current account deficit narrowing to -3.4% of GDP this year, which would be lira-supportive. On the other hand, a dovish tilt in the central bank would be very lira-negative. Next policy meeting is July 14 and a cut then is very possible after President Erdogan called for easing in either July or August.
Poland reports June CPI Wednesday. Headline inflation is expected at 4.6% y/y vs. 4.7% in May. If so, this would be the first deceleration since February but would remain well above the 1.5-3.5% target range. Central bank Governor Glapinski appears to have opened the door for a rate hike ever so slightly, saying that any exit from unconventional monetary policy should be “wisely spread over time and treated as an element of continuity of the central bank’s policies, which on the one hand cannot undermine the foundations of the post-crisis growth, and on the other hand, cannot allow the build-up of macroeconomic and financial imbalances.” Given how dovish he’s been, the fact that he is talking about talking about tapering suggests that Poland will eventually join Czech Republic and Hungary in removing accommodation.
Korea reports May IP Wednesday. IP is expected to rise 0.7% m/m vs. -1.6% in April. June trade data will be reported Thursday. Exports are expected to rise 33.8% y/y vs. 45.6% in May, while imports are expected to rise 33.6% y/y vs. 37.9% in May. CPI will be reported Friday, with headline inflation expected at 2.5% y/y vs. 2.6% in May. Last week, BOK Governor Lee said that policy normalization was now expected to begin in 2021. While not imminent, we should expect the process of "orderly normalization” to start in Q4, pending more information on external demand and the virus outlook. As always, BOK officials are worried about financial stability risks from elevated household debt levels, so they won’t rush into tightening. Next policy meeting is July 15 and no change is expected.
China reports official PMI readings Wednesday. Manufacturing is expected at 50.8 vs. 51.0 in May, while non-manufacturing is expected at 55.3 vs. 55.2 in May. Caixin reports its manufacturing PMI Thursday, which is expected at 51.9 vs. 52.0 in May. The takeaway is that while the recovery continues, the pace is likely to continue easing modestly as policymakers stress deleveraging, rebalancing , and regulating. The liquidity crunch appears to be easing after the PBOC added liquidity to the system several times this past week to help address quarter-end needs.
Indonesia reports June CPI Thursday. Headline inflation is expected at 1.50% y/y vs. 1.68% in May. If so, it would remain well below the 2-4% target range. Bank Indonesia kept rates on hold at the June 17 meeting. Officials seem comfortable with rates at this level and should stay on hold for most of the year as the country deals with a resurgence in Covid cases. Recall that the government has just announced new mobility restrictions after the new case count rose to 10,000 a day. BI will surely be behind many of its EM peers in entering the tightening cycle, and we think this is appropriate. Next policy meeting is July 22 and no change is expected then.