EM Preview for the Week Ahead

EM had a mixed week and we continue to believe divergences will remain in place. Please see our recent piece “Where Has All the Carry Gone?” for our most recent take in EM currencies.

AMERICAS

Mexico reports mid-August CPI Monday. Headline is expected to rise 3.89% y/y vs. 3.59% in mid-July. If so, this would be the highest since June 2019 and would be approaching the top of the 2-4% target range. At its last policy meeting August 13, Banco de Mexico cut rates 50 bp to 4.5% and signaled further cuts were likely. Next policy meeting is September 24 and another cut then is expected. Q2 current account data will be reported Tuesday. Banco de Mexico releases its quarterly inflation report Wednesday and then its minutes Thursday. July trade will be reported Thursday, where a $175 mln surplus is expected.

Brazil reports mid-August IPCA inflation Tuesday. It is expected to rise 2.33% y/y vs. 2.13% in mid-July. If so, it would be the highest since April but still below the 2.5-5.5% target range. At its last policy meeting August 5, COPOM cut rates 25 bp to 2.0% and left the door open to further easing. Next policy meeting is September 16 and steady rates are expected, as the weak real poses risks right now. Brazil also reports July current account and FDI data that day. Central government budget data for July will be reported Friday, where a deficit of -BRL156.1 bln is expected.

 

EUROPE/MIDDLE EAST/AFRICA

Bank of Israel meets Monday and is expected to keep rates steady at 0.10%. At the last meeting July 6, the bank kept rates steady but announce it would buy corporate debt for the first time. As such, it will likely wait to see the impact before making any further policy changes. Since then, the shekel has appreciated 1.5% against the dollar and we suspect the central bank is buying dollars around the 3.40 area to slow the move. CPI fell -0.6% y/y in July, the fourth straight month of deflation and well below the 1-3% target range.

South Africa reports July CPI Wednesday. Headline is expected to rise 2.9% y/y vs. 2.2% in June, while core is expected to remain steady at 3.0% y/y. If so, inflation would still remain below the 3-6% target range. PPI will be reported Thursday and is expected to pick up to 1.5% y/y. At its last meeting July 23, the bank cut rates 25 bp to 3.5% and signaled rates were likely to remain on hold. Next SARB meeting is September 17 and steady rates are expected. Budget data for July will be reported Friday, where a -ZR103.4 bln deficit is expected.

National Bank of Hungary meets Tuesday and is expected to keep rates steady at 0.60%. The bank has cut rates 15 bp each at the last two meetings but hinted that further easing was limited as rates should stay “safely” above zero. CPI rose 3.8% y/y in July, the highest since March and approaching the top of the 2-4% target range. As such, we expect the bank to remain on hold for the time being.

 

ASIA

Singapore reports July CPI Monday. Headline is expected to fall -0.6% y/y vs. -0.5% in June, while core is expected to fall -0.3% y/y vs. -0.2% in June. July IP will be reported Wednesday and is expected to contract -6.9% y/y vs. -6.7% in June. The government just announced another stimulus package. While deflation remains in place, the MAS may remain on hold at its October policy meeting to see how the economy responds to the stimulus.

Taiwan reports July IP Monday. It is expected to rise 3.5% y/y vs. 7.3% in June. Last week, July export orders were reported up 12.4% y/y, the strongest since January 2018 and the fifth straight month of growth. This suggests a solid showing for exports in H2 and early 2021. As such, the central bank will likely remain on hold at its next quarterly policy meeting September 17.

Hong Kong reports July trade Wednesday. Exports are expected to fall -3.9% y/y and imports by -6.3% y/y. Mainland trade data have recovered but this has not yet translated into improvement for Hong Kong yet. Domestic activity remains weak, especially after restrictions were tightened in response to the rising virus numbers. With those numbers falling, policymakers are coming under pressure to loosen those restrictions again.

Bank of Korea meets Thursday and is expected to keep rates steady at 0.50%. CPI rose 0.3% y/y in July, the highest since March but still well below the 2% target. At its last meeting July 16, the bank warned that the growth outlook had deteriorated since its May forecast of -0.2% in 2020 and will be reflected in its August update.  Governor Lee repeated his comments from the June meeting that the bank will use unconventional measures if further stimulus is needed, buying government bonds should yields rise and become more volatile.