EM Preview for the Week Ahead

EM currencies were mixed in 2020 and the divergences are likely to continue in 2021. Best performers last year against the dollar were RON (+8%), CNY (+7%), KRW (+6.5%), CZK (+6.5%), and TWD (+6%), while the worst were ARS (-29%), BRL (-22%), TRY (-19.5%), RUB (-17%), and PEN (-8.5%). That said, we believe global growth and liquidity conditions remain conducive for risk assets and EM. Our weak dollar call remains intact for Q1 but the rest of the year will hinge crucially on whether the incoming Biden administration can get the virus numbers under control whilst rolling out the vaccines more effectively. Stay tuned.

AMERICAS

Brazil reports December trade sometime this week. November IP will be reported Friday and is expected to rise 3.3% y/y vs. 0.3% in October. The economy continues to recover even as price pressures pick up. IPCA inflation was 4.31% y/y in November, the highest since December 2019. Of note, the central bank’s inflation target shifted down to 2.25-5.75% this year from 2.5-5.5% in 2020. CDI market no longer sees high odds of a hike January 20 but those odds rise to around 50-50 for the March 17 meeting.

Colombia reports December CPI Tuesday. Headline inflation is expected at 1.43% y/y vs. 1.49% in November.   If so, it would be another record low reading and would move further below the 2-4% target range. Yet central bank Governor Echavarria has signaled there will be no rate cuts during the remainder of his term. Next policy meeting is January 29. His terms ends in early January, it will be up to his successor to determine if further easing is warranted then.

Chile reports December CPI. Headline inflation is expected at 2.9% y/y vs. 2.7% in November. If so, it would be the highest since October and would move closer to the center of the 2-4% target range. Still, the economy is in recovery mode and so we see steady policy for the time being. Next policy meeting is January 27 and no change is expected then. December trade will be reported Thursday.

Mexico reports December CPI Thursday. Headline inflation is expected at 3.15% y/y vs. 3.33% in November. If so, it would be the lowest since May and would move closer to the center of the 2-4% target range. Central bank minutes will also be released that day. Next policy meeting is February 11. The bank has been on hold since the last 25 bp cut to 4.25% in September. However, the decision to hold at the last meeting December 17 was split 3-2 and the bank said future decisions will depend on inflation factors. With inflation falling and the peso firming, we think easing could resume at the next meeting.

 

EUROPE/MIDDLE EAST/AFRICA

Turkey reports December CPI Monday. Headline inflation is expected at 14.20% y/y vs. 14.03% in November. If so, it would be the highest since August 2019 and would move further above the 3-7% target range. The bank just delivered a larger than expected 200 bp hike to 17.0%. Next policy meeting is January 21. If the bank wants to make a very strong statement of its commitment to orthodox policy, another hike then would do the trick.

Bank of Israel meets Monday and is expected to keep rates steady at 0.10%. For now, we see steady rates along with continued intervention to prevent excessive shekel strength. At the last policy meeting November 30, the bank left rates steady whilst noting that “The positive results in coronavirus vaccine tests are increasing optimism regarding the rapid return of the economy to a path of growth in the coming year.” This suggests no rush for further easing measures. The bank is also likely waiting to see how the March 23 election plays out. Ongoing political instability has prevented passage of budgets for both 2020 2021, which means fiscal stimulus has been limited.

Poland reports December CPI Thursday. Headline inflation is expected at 2.6% y/y vs. 3.0% in November. If so, it would be the lowest since November 2019 and would move closer to the bottom half of the 1.5-3.5% target range. Policymakers have been sounding very dovish, with Governor Glapinski saying that rates could be cut in Q1. He also expressed concern with the strong zloty, calling it “very harmful.” Comments came just weeks after the bank’s surprise FX intervention to weaken the currency. Despite this dovishness, we think the central bank is in wait and see mode with regards to rates. Next policy meeting is January 13 and no change is expected then.

 

ASIA

Singapore reports advance Q4 GDP Monday. Growth is expected to slow to 1.3% q/q vs. 9.2% in Q3. November retail sales will be reported Tuesday, with headline expected to fall -8.0% y/y vs. -8.6% in October. The economy continues to recover along with much of the region, but there are clearly risks of slowing momentum. If the economy continues to slow, the MAS may ease policy by adjusting its S$NEER trading band at the next policy meeting in April.

Caixin reports December China manufacturing PMI Monday. It is expected to fall a couple of ticks to 54.7. Caixin services and composite PMI readings will be reported Wednesday, with services is expected to rise a couple of ticks to 58.0. For now, the mainland economy continues to recover and this is helping many of the regional exporters recover as well. Yet there are no signs yet that the PBOC is anywhere close to removing its accommodative stance. For now, it’s steady as she goes.

Indonesia reports December CPI Monday. Headline inflation is expected at 1.61% y/y vs. 1.59% in November. If so, it would be the highest since June but still well below the 2-4% target range. The central bank delivered a surprise 25 bp cut to 3.75% at the November 19 meeting but then stayed on hold in December as it expressed concern about a weak rupiah. We think further easing is possible in 2021 if the rupiah firms. Next policy meeting is January 21 and no change is expected then.

Thailand reports December CPI Tuesday. Headline inflation is expected at -0.38% y/y vs. -0.41% in November. If so, it would be the highest since February but still well below the 1-4% target range. The recovery is at risk this year as regional tourism is likely to remain weak. Furthermore, new restrictions are expected to be announced this week as outbreaks spread in several provinces. Next policy meeting is February 3 and no change is expected then. With rates at 0.50%, we think fiscal policy is likely to carry the load this year.

Taiwan reports December CPI Thursday. Headline inflation is expected at 0.10% y/y vs. 0.09% in November. While the central bank does not have an explicit inflation target, low price pressures should allow it to keep rates steady for much of 2021. Next policy meeting is March 18 and rates are expected to remain steady at 1.1125%. December exports will be reported Friday. Exports are expected to rise 9.6% y/y vs. 12.0% in November, while imports are expected to rise 4.6% y/y vs. 10.0% in November.