EM Preview for the Week Ahead

Most of EM is taking advantage of recent broad dollar weakness. Only TRY, CLP, and ARS lost ground against the dollar last week, while the biggest gainers were BRL, MXN, and RUB. We expect the dollar to remain under pressure this week, which should allow EM currencies with solid fundamentals to rally further. As always, we look for divergences within EM.

AMERICAS

Mexico reports August IP Monday. It is expected to contract -10.3% y/y vs. -11.3% in July. Overall, the economy remains very weak and that is why we think the easing cycle may be extended into 2021.   Lower oil prices are another headwind.  Banco de Mexico cut rates 25 bp to 4.25% at its last meeting September 24.  Next policy meeting is November 12 and another 25 bp cut is expected then. September CPI inflation unexpectedly eased to 4.01% y/y from 4.05% in August, further supporting another rate cut.

Chile central bank meets Thursday and is expected to keep rates steady at 0.5%. September CPI accelerated to 3.1% y/y vs. 2.8% expected and 2.4% in August, the highest since April and back in the top half of the 2-4% target range.  At its last policy meeting September 1, the central bank signaled steady rates for the next two years and added it may take further measures if needed.  However, with inflation rising and the bank seeing signs of a rebound in retail and manufacturing, we see steady rates for now.

Colombia reports August manufacturing production and retail sales Thursday. The former is expected to contract -6.6% y/y vs. -8.5% in July, while the latter is expected to contract -10.8% y/y vs. -12.4% in July. August trade will be reported Thursday. At its last policy meeting September 25, the bank cut rates 25 bp to 1.75% and said future decisions would be data dependent.  The data continue to come in weak and lower oil prices will add to the headwinds.  Next policy meeting is October 30 and another 25 bp cut to 1.5% is likely.

 

EUROPE/MIDDLE EAST/AFRICA

Czech Republic reports September CPI Monday. Inflation is expected to pick up to 3.5% y/y from 3.3% in August. If so, it would be the highest since February and move further above the 1-3% target range. Yet with the economy struggling under the viral outbreak, we see no risk of tightening by the central bank anytime soon. Recent koruna weakness should help the economy, as the nearly 4% rise in EUR/CZK is equivalent to about 100 bp of easing, according to the central bank’s models.

Turkey reports August current account data Monday. A deficit of -$4.4 bln is expected. If so, the 12-month total would rise to -$22.7 bln and the highest since November 2019. Turkey’s external vulnerabilities are rising sharply, as foreign reserves continue to bleed. August IP will be reported Tuesday and is expected to rise 7.1% y/y vs. 4.4% in July. After the surprise hike last month, the central bank has continued to do backdoor tightening and has boosted the average cost of funds to 11.32%, above the old ceiling of 11.25% but still well below the new ceiling of 13.25%.  Next policy meeting is October 22 and another outright rate hike is possible then if the lira continues to weaken.

South Africa reports August manufacturing production Monday. It is expected to contract -7.8% y/y vs. -10.6% in July. August retail sales will be reported Wednesday and is expected to contract -7.0% y/y vs. -9.0% in July. Next SARB policy meeting is November 19 and no change is expected then.   However, with the economy still very weak, we see some chance of a dovish surprise then.  Much will depend on the external environment and how the rand is trading.

Israel reports September CPI Thursday. Deflation is expected to ease to -0.7% y/y from -0.8% in August. If so, inflation would remain well below the 1-3% target range. Next central bank policy meeting is October 22. Rates are expected to remain steady at 0.10% but there is a risk that the bank expands its asset purchases in response to rising bond yields and a steepening curve. Also, recent shekel gains are likely to trigger a stronger response by the bank to prevent excessive appreciation.

 

ASIA

China reports September money and loan data sometime this week. Readings are expected to show continued reliance on credit to boost this recovery. Trade data will be reported Tuesday, with exports expected to rise 10.0% y/y and imports expected to rise 0.1% y/y. CPI and PPI will be reported Thursday, with the former expected to rise 1.9% y/y vs. 2.4% in August and the latter expected to fall -1.9% y/y vs. -2.0% in August. When all is said and done, the mainland economy remains on firm footing and is leading the recovery in the region.

India reports September CPI and August IP Monday. Inflation is expected to pick up to 6.90% y/y from 6.69% in August, while IP is expected to contract -7.6% y/y vs. -10.4% in July. WPI will be reported Wednesday and is expected to rise 0.91% y/y vs. 0.16% in August. With inflation likely to continue running above the 2-6% target range, no wonder the RBI left rates steady last week. However, the bank did address the sluggish economy by expanding its asset purchases. September trade will be reported Thursday.

Bank Indonesia meets Tuesday and is expected to keep rates steady at 4.0%. Headline inflation is expected to slow to 1.30% y/y from 1.32% in August.  If so, it would remain well below the 2-4% target range.  Yet despite low price pressures, the bank left rates unchanged at its last two meetings August 19 and September 17 and was most likely due to the weak rupiah.  Foreign fixed income investment has been slipping, making a rate cut now risky. September trade will be reported Thursday, with exports expected to contract -8.9% y/y and imports by -25.5% y/y.

Monetary Authority of Singapore meets Wednesday and is expected to keep policy unchanged. We expect no change in policy at this semiannual meeting, as policymakers have signaled that fiscal policy will carry much of the load going forward.  Its last policy was moved up from April to March 30 and policy was eased then by reducing the slope of the S$NEER band to zero appreciation starting at the prevailing level.  The MAS also eased at the October 2019 meeting by reducing the slope of the S$NEEER slightly. Q3 GDP will be reported that same day and is expected to grow 33.3% SAAR vs. -42.9% in Q2. September trade will be reported Friday, with NODX expected to rise 12.5% y/y vs. 7.7% in August.

Bank of Korea meets Wednesday and is expected to keep rates steady at 0.50%. September CPI rose 1.0% y/y vs. 0.5% expected and 0.7% in August. It was the highest since March but still well below the 2% target.  At its last meeting, the bank kept rates steady while cutting its GDP forecast for this to -1.3% from -0.2% previously.  Governor Lee said then that “There is still room in the rate policy, but we’ll be careful,” adding the bank must weigh the benefits and side-effects from cutting rates again. While we do not think the bank is overly concerned about rising inflation, it will likely keep it on hold for the time being.