EM Preview for the Week Ahead

EM currencies were mixed last week as the dollar got some traction against the major currencies. We think the dollar is likely to come under broad-based pressure this week as the FOMC is likely to re-emphasize its ultra-dovish stance established at Jackson Hole. EM FX should benefit but divergences should continue. US data is also likely to continue sequentially weakening.

AMERICAS

Colombia reports July manufacturing production and retail sales Monday. The former is expected to fall -3.4% y/y vs. -9.9% in June, while the latter is expected to fall -10.0% y/y vs. -14.2% in June. July trade data will be reported Thursday. The central bank just cut rates 25 bp to 2.0% on August 31. Governor Echavarria said then that the scope for further easing “has been narrowing, definitely” and added that “I believe we are getting to a point where in each board meeting we are going to look at the facts, at what the economic data say, and take a decision.” Next policy meeting is September 25. CPI rose 1.9% y/y in August, the lowest since November 2019 and below the 2-4% target range. We see scope for another 25 bp cut then, especially if oil prices continue to sink.

Brazil COPOM meets Wednesday and is expected to remain on hold. At the last meeting August 5, it cut rates 25 bp to 2.0% and left the door open for further easing.  However, IPCA inflation accelerated to 2.44% y/y from 2.31% in July, the third straight month of acceleration and the highest since March. While still below the 2.5-5.5% target range, inflation warrants caution and we believe the easing cycle is over now.

 

EUROPE/MIDDLE EAST/AFRICA

Turkey reports July IP Monday. It is expected to rise 4.8% y/y vs. 0.1% in June. The economy remains weak but inflation remains high. The central bank next meets September 24 and we cannot rule out an outright hike. After cutting rates aggressively, the bank unexpectedly kept rates steady at the June 25 meeting. It remained on hold at 8.25% in July and August, though it did some backdoor tightening by forcing banks to borrow from it at rates higher than the policy rate. The weighted average cost of funding rose from below 7.5% in mid-July to around 10.15% in early September. That has started to rise again to 10.30% in recent days as the lira makes new lows. If this starts to bump up against the Late Liquidity Window rate of 11.25%, then an outright hike in all rates will be needed.

Israel reports Q2 current account data Monday. August CPI will be reported Tuesday, with headline inflation expected to remain steady at -0.6% y/y. If so, it would remain well below the 1-3% target range. Q2 GDP will be reported Wednesday. With the nation forced to enter a second nationwide crackdown due to resurging virus numbers, the Q3 economic outlook has worsened. A full lockdown will be seen for two weeks, followed by two more weeks with strict limits on mobility and activity. After that, restrictions will be applied only to communities with large outbreaks. Several ultra-Orthodox lawmakers have threatened to pull out of the ruling coalition if the lockdown is enacted during the High Holy Days that begin September 18 and last for around three weeks.

Poland reports July trade and current account data Monday. The central bank meets Tuesday and is expected to remain on hold. CPI rose 2.9% y/y in August, the lowest since May and in the bottom half of the 2.5-4.5% target range. For now, the bank is likely to remain in wait and see mode while continuing its asset purchases. August industrial output and PPI will be reported Friday. The former is expected to rise 3.1% y/y vs. 1.1% in July, while the latter is expected to fall -1.0% y/y vs. -0.6% in July.

Russia reports August IP Tuesday. It is expected to fall -6.4% y/y vs. -8.0% in July. The central bank meets Friday and is expected to keep rates steady at 4.25%. A handful of analysts look for a 25 bp cut to 4.0%. Lower oil prices are a reason to cut, but the weak ruble is a reason not to cut. Inflation is also picking up and so the bank is likely to remain cautious. August retail sales will also be reported Friday, and are expected to fall -1.7% y/y vs. -2.6% in July.

South Africa reports July retail sales Wednesday. Sales are expected to fall -5.0% y/y vs. -7.5% in June. SARB meets Thursday and is expected to cut rates 25 bp to 3.25%. Market is split, as 7 analysts look for the cut and 5 see steady rates at 3.5%. At its last meeting July 23, the bank cut rates 25 bp to 3.5% and signaled rates were likely to remain on hold. Since then, CPI inflation jumped a full percentage point to 3.2% y/y, the highest since March and back within the 3-6% target range.

 

ASIA

India reports August CPI and WPI Monday. The former is expected to fall -0.31% y/y vs. -0.58% in July, while the latter is expected to rise 6.90% y/y vs. 6.93% in July. If so, inflation would remain above the 2-6% target range. The Reserve Bank of India unexpectedly left rates steady at the last meeting August 6, when consensus saw a 25 bp cut. Next policy meeting is October 1. A lot can happen between now and then but a resumption of the easing cycle is possible.

China reports August IP and retail sales Tuesday. The former is expected to rise 5.1% y/y vs. 4.80% in July, while the latter is expected to be flat y/y vs. -1.1% in July. Money and loan data reported last week was much stronger than expected and supports our view that the recovery is likely to pick up a bit as we move through H2. China and India have agreed to de-escalate tensions along the Himalayan border after their Foreign Ministers met last week for the first time since May, when tensions first rose.

Indonesia reports August trade data Tuesday. Exports are expected to fall -8.48% y/y vs. -9.90% in July, while imports are expected to fall -22.44% y/y vs. -32.55% in July. Bank Indonesia meets Thursday and is expected to keep rates steady at 4.0%. This is likely due to exchange rate concerns, as recent rupiah weakness has led BI to intervene. A rate cut is the last thing that the currency needs. CPI rose only 1.3% y/y in August, the lowest since May 2000 and well below the 2-4% target range. The bank kept rates steady at the last meeting August 19 but we think the easing cycle will eventually resume as the economic outlook dims from the virus resurgence.

Taiwan central bank meets Thursday and is expected to keep rates steady at 1.125%. The central bank cut rates 25 bp to 1.125% in March but then unexpectedly left rates steady in June.  Given ongoing deflation and risks to growth, we see small risks of a dovish surprise. August CPI came in at -0.33% y/y vs. -0.52% in July, though there is no explicit inflation target.  Reports suggest the government is encouraging companies to relocate factories from the mainland back to Taiwan due to rising US-China tensions. Economic Affairs Minister Wang said more than $38 bln of investment has come back since January 2019.