EM FX has taken advantage of continued dollar weakness in recent days. While the Blue Wave is still open to question until January, we think the underlying factors behind dollar weakness remain intact: rising virus numbers, a slowing US economy, an ultra-dovish Fed, and no near-term prospects for fiscal stimulus. That said, we expect to see continued divergence within EM FX.
Mexico reports October CPI Monday. Headline inflation is expected at 4.06% y/y vs. 4.01% in September. September IP will be reported Wednesday and is expected to rise 0.8% m/m vs. 3.3% in August. Banco de Mexico meets Thursday and is expected to cut rates 25 bp to 4.0%. However, the market is split as nearly a third of the analysts polled by Bloomberg see steady rates. We favor a cut, especially as the peso is trading at the strongest level since March.
Brazil reports September retail sales Wednesday. Sales are expected to rise 1.2% m/m vs. 3.4% in August. The economy is recovering and inflation is creeping higher. IPCA inflation was 3.92% y/y in October, the highest since February but still in the bottom half of the 2.5-5.5% target range. As such, we believe market pricing for a 25 bp hike in January followed by a series of 50 bp hikes going at least to mid-year seem too aggressive. Next COPOM meeting is December 9 and rates are likely to remain steady at 2.0%.
Peru central bank meets Thursday and is expected to keep rates steady at 0.25%. CPI rose 1.99% y/y in October, right at the center of its 1-3% target range. For now, the bank is likely to remain on hold as fiscal policy likely carries the load for now.
Czech Republic reports October CPI Tuesday. Headline inflation is expected at 3.0% y/y vs. 3.2% in September. Lats week, the central bank kept rates on hold at 0.25%. Even though the official forward guidance sees gradual rate hikes starting next year, Governor Rusnok said he sees rates staying unchanged longer and can’t rule steady rates all next year. This was a strange mixed message. Why put a hike in the forward guidance if officials aren’t convinced of it themselves? That said, we think Rusnok is right and see no hike until 2022 at the earliest. Next central bank policy meeting is December 17 and no change is expected then.
Hungary reports October CPI Tuesday. Headline inflation is expected at 3.1% y/y vs. 3.4% in September. Q3 GDP will be reported Friday and is expected to grow 10.4% q/q vs. -14.5% in Q2. Next central bank policy meeting is November 17 and no change is expected then, especially if the forint remains relatively firm. However, US-Hungary relations are likely to worsen after Orban’s plans for a Trump victory were dashed. Orban often clashed with the Obama administration over criticism of his nation’s move towards illiberal democracy.
Turkish political risk jumped over the weekend. First, President Erdogan fired central bank Governor Murat Uysal. He was replaced by former Finance Minister Naci Agbal, who has no experience in monetary policy but regarded as a market-friendly technocrat. Many now expect Agbal to quickly hike rates aggressively to stabilize the lira, as he probably would not have taken the post without freedom to pursue orthodox policies. However, this notion was undermined by the subsequent resignation of economic czar Albayrak, who also happens to be Erdogan’s son-in-law. The reason given was health reasons, but there is obviously more to this than meets the eye. Turkey reports September current account data Wednesday. September IP will be reported Friday and is expected to rise 8.5% y/y vs. 10.4% in August.
Russia reports September trade data Wednesday. Q3 GDP will be reported Thursday. For now, economics is taking a back seat to politics in Russia after reports emerged last week that President Putin would be stepping down in January due to health reasons. Like Erdogan and Orban, Putin will have to deal with the reality of a Biden presidency and the risks of potential sanctions and deteriorating relations.
Malaysia reports September IP Monday. It is expected to rise 2.5% y/y vs. 0.3% in August. Q3 GDP will be reported Friday and is expected to grow 11.0% q/q vs. -16.5% in Q2. Bank Negara Malaysia kept rates steady at 1.75% last week, as expected. The bank noted improvements in the economy in Q3 but warned that targeted restrictions to control the virus are likely to hurt the outlook for Q4. It left the door open for further easing and downside risks should keep it in dovish mode for the foreseeable future. Next policy meeting is January 20. Meanwhile, fiscal policy is carrying the load for now as the government announced an expansive budget last week.
Taiwan reports October trade data Monday. Exports are expected to rise 5.8% y/y vs. 9.4% in September, while imports are expected to fall -2.1% y/y vs. -5.4% in September. Orders have risen y/y for seven straight months and suggest robust shipments going into Q2. US-Taiwan relations are likely to come under greater scrutiny under a Biden administration. President Trump has been selling weaponry to Taiwan and inflaming cross-strait tensions. While Biden is likely to take a tough economic stance with China, we think he will be a bit more circumspect with regards to Taiwan.
China reports October money and loan data sometime this week. Both money and new loans are expected to ease from the previous month. October CPI and PPI will be reported Tuesday. CPI expected to rise 0.8% y/y vs. 1.7% in September, while PPI is expected to fall -1.9% y/y vs. -2.1% in September. Over the weekend, October trade data came in stronger than expected, with exports rising 11.4% y/y and import rising 4.7% y/y. With the economy rebounding, PMOC officials are starting to talk about withdrawing stimulus. Vice Governor Liu said, “Exit is a matter of time and it is also necessary, But the timing and method of exit need to be carefully evaluated, mainly based on the status of economic recovery.”
India reports October CPI and September IP Thursday. Headline inflation is expected at 7.14% vs. 7.34% in September, while IP is expected to contract -2.0% y/y vs. -8.0% in August. If so, inflation would remain above the 2-6% target range for seventh straight month. This has kept the RBI on hold since the last 40 bp cut back in May. Next RBI policy meeting is December 4 and steady rates are likely until inflation is under better control. October trade will be reported sometime this week.