EM Preview for the Week Ahead

EM FX continues to take advantage of broad-based dollar weakness. Last week, most EM currencies strengthened significantly and many are making new multi-year highs. More policymakers are pushing back against currency strength, and while this may bring more countries into the spotlight as currency manipulators (see our recent report here), that is simply part of the cost-benefit analysis for FX intervention. Poland became the latest to intervene last week. That said, all can only hope to slow the move within this weak dollar environment, not reverse it.

AMERICAS

Brazil reports mid-December IPCA inflation Tuesday. Inflation is expected to accelerate to 4.35% y/y from 4.22% in mid-November. If so, it would be the highest since May 2019 and would move further into the upper half of the 2.5-5.5% target range. In 2021, the target range drops to 2.25-5.25% and so inflation is likely to move closer to the top of that new range in the coming months. Next COPOM meeting is January 20 and CDI market is pricing in a slight chance of a hike then. However, a 25 bp hike is fully priced in for the March 17 meeting.

Mexico reports mid-December CPI Wednesday. Inflation is expected at 3.16% y/y vs. 3.43% in mid-November. If so, it would be the lowest since May and nearing the center of the 2-4% target range. Banco de Mexico left rates steady at 4.25% last week, as expected. The vote was 3-2 and the bank said it needs more time to confirm that inflation is slowing. This suggests the door remains open to further easing. Next policy meeting is February 11 and if inflation continues to slow and the peso remains firm, a cut then is very possible. November trade will be reported Thursday.

 

EUROPE/MIDDLE EAST/AFRICA

Poland reports November real retail sales Monday. Sales are expected to fall -7.8% y/y vs. -2.3% in October and reflect the widening lockdowns. Last Friday, the central bank sold PLN in the local FX market, driving EUR/PLN higher. This is pretty rare, and the timing was strange given EUR/PLN was nowhere close to the August low near 4.3745 or the March low near 4.2035. Afterward, MPC member Zyzynski said the intervention was meant to “encourage” EUR/PLN to return to around 4.50.

Israel’s ruling coalition must agree to the national budget by Wednesday. If not, the government automatically falls and will be forced to call fresh elections. If so, these would be the fourth vote in two years. Central bank Governor Yaron warned this may paralyze parts of the economy, which is already struggling from the pandemic. The Finance Ministry’s Accountant General warned in a letter to government ministries that without passage of a new budget, “this situation will require further cutting of government expenditures.” November manufacturing production will be reported Thursday.

Turkey central bank meets Thursday and is expected to hike rates 150 bp to 16.5%. As usual, the market is all over the place. Of the 20 analysts polled by Bloomberg, 1 sees no change, 4 see 100 bp, 1 sees 125 bp, 9 see 150 bp, and 5 see 200 bp. The lira has stabilized since the 475 bp hike in November. However, inflation continues to rise and at 14.03% y/y in November remains far above the 3-7% target range. December CPI will be reported January 4 and is expected to rise 14.30% y/y. A 150 bp hike to 16.5% would push real rates up to around 2.0-2.5%, which we think would help support the lira as inflation continues to accelerate.

 

ASIA

Korea reports trade data for the first 20 days of December Monday. Total exports rose 26.9% y/y in the first 10 days of December, while daily average exports rose 11.9% y/y. Exports to China were up 12.1% y/y, to US up 23.1%, to EU up 45.6%, and to Japan up 22.5%. Total imports rose 7.9% y/y during the same period. For now, the strong won appears to have had no significant impact on exports.

Taiwan reports November export orders Monday. Orders are expected to rise 14.3% y/y vs. 9.1% in October. If so, it will be the strongest since January 2018 and orders will have risen y/y for nine straight months, suggesting export strength will be seen through at least mid-2021. Currency strength has not had much impact on exports though we expect continued intervention as policymakers probably won’t be very concerned about being put on the US Treasury’s Monitoring List for currency manipulators. November IP will be reported Wednesday and is expected to rise 5.5% y/y vs. 7.06% in October.

Malaysia reports November CPI Wednesday. Headline CPI is expected to remain steady at -1.5% y/y. Bank Negara does not have an explicit inflation target but low price pressures will allow it to keep policy loose in 2021 to help support the recovery. Next policy meeting is January 20 and rates are expected to remain steady at 1.75%. The government was able to narrowly pass its 2021 budget last week 111-108, providing a bit of political stability ahead as failure to pass would have been tantamount to a vote of no confidence.

Singapore reports November CPI Wednesday. Headline CPI is expected to remain steady at -0.2% y/y. The Monetary Authority of Singapore does not have an explicit inflation target but low price pressures will allow it to keep policy loose in 2021 to help support the recovery. Next semi-annual policy meeting is in April and its current setting of zero slope for the S$NEER trading band is expected to remain steady. November IP will be reported Thursday and is expected to rise 11.7% y/y vs. -0.9% in October.

Bank of Thailand meets Wednesday and is expected to keep rates steady at 0.50%. CPI fell -0.4% y/y in November, well below the 1-4% target band. With the economy coming under pressure from widening lockdowns, we expect fiscal stimulus to bear the load in 2021. That said, the BOT will maintain easy conditions for the foreseeable future to help lay the groundwork for the recovery. FX intervention is likely to continue, as the BOT said its actions have only been intended to smooth volatility and not to target any particular level. Thailand was also placed on the US Treasury’s Monitoring List for currency manipulators.