EM FX took advantage of ongoing broad dollar weakness and posted another strong week. Many currencies are trading at multi-year highs against the dollar. While some EM policymakers have expressed concern and taken limited measures, there’s really not much that can be done in this current environment to prevent further appreciation. Global investors are drawn both to the higher yielding bond markets (especially China, Mexico, South Africa, and Indonesia) as well as the surging equity markets (MSCI EM is up five straight weeks and nine of the past ten). EM remains in a sweet spot of a low rate environment in DM coupled with an improving global growth outlook.
Chile central bank meets Monday and is expected to keep rates steady at 0.5%. Ahead of the decision, Chile reports November CPI and trade data. Inflation is expected to remain steady at 3.0% y/y, right at the target and the center of the 2-4% target range. We see no change in rates for the foreseeable future. President Pinera is expected to sign the bill allowing workers to tap their pension savings for the second time. Workers will be allowed to withdraw up to CLP4.3 mln ($5800) tax free to help cope with the pandemic and could lead to as much as $19 bln in fresh withdrawals. The central bank announced extraordinary measures to allow for an orderly liquidation of pension assets, but local assets are likely to come under pressure regardless while the peso is likely to strengthen from repatriation of overseas asset.
Mexico reports November CPI Wednesday. Headline inflation is expected at 3.39% y/y vs. 4.09% in October. If so, it would be the lowest since June and nearing the center of the 2-4% target range. Banco de Mexico unexpectedly kept rates steady at 4.25% at its November 12 meeting but left the door open for more cuts. Next policy meeting is December 17 and a 25 bp cut to 4.0% is likely if the peso remains firm. Indeed, charts point to a test of the year’s low for USD/MXN near 18.5235 from February. October IP will be reported Friday and is expected to fall -5.6% y/y vs. -6.2% in September.
Brazil reports November IPCA inflation Tuesday. Headline is expected to rise 4.19% y/y vs. 3.92% in October. If so, inflation would be the highest since January and would move into the top half of the 2.5-5.5% target range. COPOM then meets Wednesday and is expected to keep rates steady at 2.0%. However, CDI market is pricing a chance of the first hike at the January 20 meeting, followed by a series of hikes throughout the year. October retail sales will be reported Thursday and are expected to rise 7.0% y/y vs. 7.3% in September.
Peru central bank meets Thursday and is expected to keep rates steady at 0.5%. Inflation was 2.1% y/y in October, the highest since June 2019 and in the upper half of the 1-3% target range. Still, the bank is unlikely to be too concerned about price pressures and is instead focusing on keep monetary policy loose. We see no change in rates for the foreseeable future. Indeed, the central bank should strive to maintain stability even as political uncertainty remains high. Even though interim President Sagasti won an overwhelming 111-7 vote of confidence in Congress, the situation remains very fluid. That Sagasti is the third president in a little over a week underscores this.
Czech Republic reports October retail sales Monday. Sales are expected to fall -5.3% y/y vs. -2.8% in September. Industrial and construction output and trade will be reported Tuesday. November CPI will be reported Thursday, with headline inflation expected to fall a tick to 2.8% y/y. if so, inflation would be the lowest since October 2019 and move further within the 1-3% target range. Next policy meeting is December 17 and rates are expected to remain steady at 0.25%.
South Africa reports Q3 GDP Tuesday. Growth is expected at 54.6% SAAR vs. -51.0% in Q2. November CPI and October retail sales will be reported Wednesday. Headline inflation is expected to fall a tick to 3.2% y/y, while sales are expected to fall -2.3% y/y vs. -2.7% in September. SARB narrowly kept rates steady at 3.5% at its November meeting. Next policy meeting is January 21 and a cut then is possible if the economy remains weak, especially if the rand continues to firm. Q3 current account and manufacturing production will be reported Thursday. A current account surplus equal to 3.7% of GDP is expected vs. -2.4% of GDP in Q2, while manufacturing is expected to fall -5.4% y/y vs. -2.6% in September.
Turkey reports October current account data Friday. A deficit of only -$10 mln is expected vs. -$2.36 bln in September. If so, the 12-month total would still increase to -$30.5 bln, the largest since October 2018. The good news is that monetary policy has finally pivoted back to an orthodox framework and so higher interest rates should attract the foreign investment needed to finance Turkey’s external deficits. Next central bank policy meeting is December 24. While the tightening cycle probably hasn’t ended, a stable lira could allow the bank to pause for a meeting.
Russia reports October trade and Q3 GDP Friday. GDP is expected to contract -3.6% y/y vs. -3.6% in Q2. Higher oil prices should help boost the economy in Q4 and beyond, and lower interest rates would help. Yet the central bank has been on hold since the last 25 bp cut to 4.25% back in July. CPI has crept higher since that cut to 4.4% y/y in November, the highest since July 2019 and above the 4% target. Next policy meeting is December 18 and rates are likely to remain steady at 4.25%.
China reports November trade and foreign reserves Monday. Exports are expected to rise 12.0% y/y vs. 11.4% in October, while imports are expected to rise 7.0% y/y vs. 4.7% in October. Reserves are expected to rise modestly to $3.15 trln. CPI and PPI will be reported Wednesday, with the former expected to come in flat y/y and the latter to fall -1.8% y/y. Lack of price pressures should allow the PBOC to keep policy loose, and we would downplay notions that the bank is looking to normalize policy anytime soon. Money and loan data may be reported this week but no date has been set.
Taiwan reports November trade Monday. Exports are expected to rise 8.5% y/y vs. 11.2% in October, while imports are expected to rise 1.3% y/y vs. -1.0% in October. For now, the strong currency has not had a discernible impact on exports. November CPI will be reported Tuesday, with headline inflation expected flat y/y vs. -0.24% in October. The central bank does not have an explicit inflation target but low price pressures should allow it to keep policy steady for the foreseeable future, especially if TWD continues to firm. Next policy meeting is December 17 and rates are expected to remain steady at 1.125%.