EM Preview for the Week Ahead

EM currencies are coming off a solid week. The dollar remains on its back foot after the Fed delivered a dovish hold and US economic data continue to soften. Broad-based dollar weakness is likely to continue this week, and EM currencies should once again take advantage of this. That said, we continue to see divergences. TRY and BRL are likely to continue underperforming, while the Asian currencies should continue to outperform due to strong fundamentals.

AMERICAS

Brazil COPOM minutes will be released Tuesday. The bank just left rates steady at 2.0% last week and introduced dovish forward guidance, saying it “does not intend to reduce the monetary stimulus unless inflation expectations, as well as its baseline scenario inflation projections, are sufficiently close to the inflation target.”  It also sees the current rise in inflation as temporary.  Mid-September IPCA inflation will be reported Wednesday and is expected to rise 2.59% y/y vs. 2.28% in mid-August. If so, it would be the highest since March and back within the 2.5-5.5% target range. The central bank releases its quarterly inflation report Thursday. August current account and FDI data will be reported Friday.

Banco de Mexico meets Thursday and is expected to cut rates 25 bp to 4.25%. A couple of analysts see steady rates. Ahead of the decision that day, Mexico reports mid-September CPI. Headline is expected to rise 4.07% y/y vs. in mid-August. If so, inflation would be the highest since May 2019 and the first time above the 2-4% target range since then. Still, we think the firm peso will give the central bank confidence to continue cutting rates. Consensus sees one more cut after this one to 4.0% in Q4. However, we see potential for the easing cycle to be extended into 2021.

Colombia central bank meets Friday and is expected to cut rates 25 bp to 1.75%. At its last meeting August 31, the bank cut 25 bp but said that further cuts will be data-dependent. Since then, inflation has come in at 1.88% in August, the lowest since November 2013 and below the 2-4% target, while real sector data has been weak. Add in lower oil price and there is a strong case for another cut this week, especially with the peso remaining relatively firm.

 

EUROPE/MIDDLE EAST/AFRICA

Poland reports August real retail sales Monday. Sales are expected to rise 2.3% y/y vs. 3.0% in July. Central bank minutes will be released Thursday. At that meeting, the bank left policy unchanged and left the statement largely unchanged and once again noted “The pace of the economic recovery could also be limited by the lack of visible zloty exchange-rate adjustment to the global pandemic-driven shock and to the monetary-policy easing.” EUR/PLN has basically been stuck in narrow 4.50-4.60 range since late May and it appears the bank would prefer a weaker zloty to aid the recovery.

National Bank of Hungary meets Tuesday and is expected to keep rates steady at 0.60%. After cutting rates 15 bp each in June and July, the bank stayed on hold in August and saw no room for lowering the policy rate. However, it announced increased bond purchases then to help fund the budget deficit, buying up to HUF40 bln per week and injecting liquidity into the system via HUF30 bln of repo operations per week. Here, the forint has reacted as one would expect to ultra-loose policy, with EUR/HUF moving closer to the all-time high near 370 from April.

Czech National Bank meets Wednesday and is expected to keep policy steady. The bank has been on hold since its 75 bp cut back in May. At its last meeting August 6, the bank signaled steady market rates until mid-2021 followed by a gradual increase, which we assume would be due to monetary policy tightening. Since that meeting, the real sector data have come in largely weaker than expected, while inflation appears to have peaked. As such, the bank may push out its forward guidance into H2 2021.

Turkey central bank meets Thursday and is expected to keep rates steady at 8.25%. A small handful of analysts look for hikes of 75-150 bp. Backdoor tightening has not yet reached its limits, with the average cost of funding around 10.4% currently. As such, we feel the central bank still has some room to take that average up to the Late Liquidity Window rate of 11.25% before having to hike policy rates outright. While the lira continues to weaken, the pace has been relatively controlled. Another steep drop would be the likely trigger for a rate hike.

  

ASIA

Korea reports trade data for the first 20 days of September Monday. For the first 10 days of September, exports fell -0.2% y/y while imports fell -7.6% y/y. Compare this to August, where revised data show exports contracted -10.1% y/y and imports contracted -15.8% y/y. Korea is benefitting from the regional recovery in trade and activity. While USD/KRW is trading at the lowest level since January, the more important JPY/KRW cross is nearly 7% higher during that same period as yen strength has helped keep Korean exporters competitive.

Taiwan reports August export orders Monday. Orders are expected to rise 9.2% y/y vs. 12.4% in July. Orders will have risen y/y since March, pointing to export strength in H2. August IP will be reported Wednesday and is expected to rise 2.97% y/y vs. 2.65% in July. Last week, the central bank kept rates steady at 1.125% and raised its growth forecast for this year by a tick to 1.6%. Governor Yang said Taiwan’s solid performance is being driven by strong exports. We note that export strength is all the more remarkable given TWD is trading at the strongest level against USD since February 2018.

Singapore reports August CPI Wednesday. Deflation is expected to remain steady at -0.4% y/y. The MAS does not have an explicit inflation target, but ongoing deflation may lead it to ease policy again at its October policy meeting. It’s a tough call, as real sector data have been improving in recent months, especially exports. Note that the BIS Real Effective Exchange Rate (REER) for Singapore is trading near the weakest levels since late 2011, as the currencies of its regional peers have continued to outperform. August IP will be reported Friday and is expected to contract -0.1% y/y vs. -8.4% in July.

Bank of Thailand meets Wednesday and is expected to keep rates steady at 0.50%. The bank has been on hold since its last 25 bp cut back in May. At its last meeting August 5, the bank said it was prepared to use “additional appropriate monetary policy tools” if needed. Assistant Governor Titanun warned then “that if the baht strengthens too fast, it may affect the economic recovery.”  Since then, the baht is basically flat, while deflation eased to -0.5% y/y in August from -0.98% in July and suggests the bank is not under pressure to act now.  Still, deflation has persisted for the six straight months and is still well below the 1-4% target range.