EM FX is being pulled in two different directions. On one hand, the rising global virus numbers bode ill for global growth and so EM is likely to suffer. On the other hand, the weak dollar trend remains intact. Net net, we expect EM FX to continue strengthening, though divergence are likely to continue within EM.
Colombia reports Q3 GDP data Tuesday. GDP is expected to grow 8.6% q/q vs. -14.9% in Q2, while the y/y rate is expected at -9.0% y/y vs. -15.7% in Q2. September data reported Friday suggest the economy was gathering momentum as Q3 ended. However, low oil prices are a headwind for the economy in Q4 and most likely Q1. The bank left rates steady at the October 30 meeting and said rates are likely to remain on hold for “several” months. Next policy meeting is November 27 and no change is expected then. If the economy remains sluggish in 2021, we believe the central bank will eventually resume its easing cycle.
Chile reports Q3 GDP data Wednesday. GDP is expected to grow 4.9% q/q vs. -13.2% in Q2, while the y/y rate is expected at -9.2% y/y vs. -14.1% in Q2. Higher copper prices are positive for the economic outlook, but consumers are likely to remain cautious. The lower house just approved the bill allowing citizens a second withdrawal of 10% from their pension accounts. Local analysts predict up to $4.8 bln of local fixed income instruments could be sold as a result of the next round of withdrawals.
National Bank of Hungary meets Tuesday and is expected to keep the base rate steady at 0.60%. For now, the bank appears to be relying on the 1-week deposit rate (set every Thursday) to help support the forint when needed. That rate was last hiked 15 bp to 0.75% in mid-October as EUR/HUF was rising. With the forint stabilizing, we see steady rates for the time being.
Turkey central bank meets Thursday and is expected to hike rate 475 bp to 15.0%. As usual, the market is all over the place. 1 sees steady rates, 1 sees a 150 bp hike, 1 sees 200 bp, 2 see 375 bp, 4 see 400 bp, 1 sees 450 bp, 8 see 475 bp, 2 see 500 bp, 1 sees 550 bp, and 1 sees 575 bp. Markets are giving policymakers the benefit of the doubt now but we think the bank has to deliver an outsized hike to underscore its newfound commitment to orthodox policies.
South Africa reports September retail sales Wednesday. Sales are expected to fall -2.5% y/y vs. -4.2% in August. SARB meets Thursday and is expected to keep rates steady at 3.5%. However, a handful of analysts see a 25 bp cut to 3.25%. The economy remains sluggish, while unemployment rose to 30.8% in Q3 from 23.2% in Q2. Inflation was 3.0% y/y in September, right at the bottom of the 3-6% target range. With the rand trading relatively firm, we see risks of a dovish surprise.
China reported October IP and retail sales. The former rose 6.9% y/y vs. 6.7% expected and 6.9% in September, while the latter rose 4.3% y/y vs. 5.0% expected and 3.3% in September. PBOC sets its key interest rates this week. The 1-year medium-term lending facility rate was kept steady at 2.95% today, while the 1- and 5-year loan prime rates will be set Friday and are expected to be kept steady at 3.85% and 4.65%, respectively. Still, the PBOC is likely to maintain its dovish stance well into 2021.
Thailand reports Q3 GDP data Monday. GDP is expected to grow 3.9% q/q vs. -9.7% in Q2, while the y/y rate is expected at -8.8% y/y vs. -12.2% in Q2. Bank of Thailand meets Wednesday and is expected to keep rates steady at 0.50%. However, there is a risk that it takes measures to rein in the strong baht. Finance Minister Arkhom recently said “We are doing whatever we can to help exports. We have asked the central bank to manage the baht to be supportive for exports.”
Indonesia reports October trade data Monday. Exports are expected to fall -4.36% y/y and imports by -18.93% y/y. Bank Indonesia meets Thursday and is expected to keep rates steady at 4.0%. However, the market is split as half the analysts polled by Bloomberg look for a rate cut. CPI inflation has been running below the 2.5-4.5% target range since May and yet the bank has remained on hold since the last 25 bp cut back in July. Policymakers are concerned that lower rates may discourage foreign capital inflows and weaken the rupiah. However, the currency is trading at its strongest levels since June and so we see risks of a dovish surprise. Q3 current account data will be reported Friday.
Singapore reports October trade data Tuesday. NODX are expected to rise 5.1% y/y vs. 5.9% in September. If so, they will have risen y/y for the fifth straight month and in eight of the past nine. Like Korea and Taiwan, Singapore has benefited from the regional recovery that’s being led by mainland China.
Philippine central bank meets Thursday and is expected to keep rates steady at 2.25%. However, a handful of analysts look for a 25 bp cut to 2.0% The bank recently signaled that it may cut reserve requirements and so we see risks of a dovish surprise this week. CPI inflation has been running in the bottom half of (or even below) the 2-4% target range since last May and yet the bank has remained on hold since the last 50 bp cut back in June.
Taiwan reports October export orders and Q3 current account data Friday. Orders are expected to rise 9.0% y/y vs. 9.9% in September. If so, orders will have risen y/y for eight straight months. Exports have been robust and orders suggest they will remain so into Q2. Strong fundamentals and external surpluses have made TWD the second best EM currency at +5.4% YTD, behind only CNY at +5.7% YTD.