EM ended last week on a firm note. Given the absence of any Fed-specific risks or any major US data releases, that firmness could carry over into this week. The failure to reach an agreement in Doha by oil producers is weighing on some countries through lower oil prices, but the global liquidity story ultimately remains risk-supportive for the time being. China data last week was also helpful for market sentiment.Specific country risk remains in play. The Brazil impeachment process has begun in earnest in Brazil, while the Turkish central bank could deal the markets a dovish (and negative) surprise at its policy meeting this week. Singapore reported weaker than expected March trade data, and serves as a reminder why the MAS eased policy last week.
India reports March WPI Monday, which is expected at -0.7% y/y vs. -0.9% in February. March CPI rose 4.83% y/y, the lowest since September and well within the 2-6% target range. The RBI issued a fairly dovish statement after its most recent bp cut, hinting that it is looking for further room to ease. If inflation continues to fall, another cut at the next RBI meeting June 7 seems likely.
Bank of Korea meets Tuesday and is expected to keep rates steady at 1.50%. It has been on hold since its last 25 bp cut to 1.5% back in June 2015. CPI rose only 1.0% y/y in March, well below the 2.5-3.5% target range. The ruling Saenari party had pledged to have BOK ease via some form of QE (buying MBS as well as bonds issued by state-run Korean Development Bank), but its election loss will likely put those plans on hold indefinitely.
Poland reports March industrial and construction output, retail sales, and PPI Tuesday. The central bank releases minutes from its last meeting Thursday. Almost the entire MPC has been replaced this year by the incoming Law and Justice party. It seems the bank will remain on hold near-term but the last piece of the puzzle may fall into place in June, when central bank President Belka will also be replaced. With a new head, we think the bank will likely ease in H2. Deflation risks persist with CPI at -0.9% y/y in March and well below the 1.5-3.5% target range. Next meeting is May 6, no action seen then.
Malaysia reports March CPI Wednesday, which is expected to rise 3.5% y/y. Bank Negara has been on hold since its last 25 bp hike to 3.25% back in July 2014. CPI rose 4.2% y/y in February, the highest since December 2008. While the central bank does not have an explicit inflation target, the high rate will likely keep it on hold for the foreseeable future. Meanwhile, the economy has slowed four straight quarters but growth remains fairly strong at 4.5% y/y in Q4. Next policy meeting is May 19, no action is seen then.
Taiwan reports March export orders Wednesday, which are expected at -8.0% y/y vs. -7.4% in February. It then reports March IPFriday, which is expected at -6.1% y/y vs. -3.7% in February. March CPI rose 2.0% y/y vs. 2.4% in February. This is higher than many countries in Asia, but the central bank does not have an explicit inflation target. With the economy contracting y/y in H2, another 12.5 bp cut is expected in late June.
South Africa reports March CPI Wednesday, which is expected to rise 6.5% y/y vs. 7.0% in February. The SARB sees inflation running above the 3-6% target range this year before peaking around 7.3% in Q4. Further tightening seems likely, with another 25 bp hike seen at the next policy meeting May 19. The rand may be the deciding factor then, as recent firmness should help limit price pressures.
Central Bank of Turkey meets Wednesday and is expected to keep the benchmark rate steady at 7.50%. However, another cut in the top of the rates corridor is expected, from 10.5% to 10.0%. The bank surprised markets with a 25 bp cut to the top rate last month. Governor Basci’s term ends April 19, and his replacement will likely come under pressure from the government to ease more aggressively. We think an outright cut in the benchmark rate will be seen in Q2.
Brazil reports mid-April IPCA inflation Wednesday, which is expected to rise 9.30% y/y vs. 9.95% in mid-March. With disinflation being seen, analysts are looking for an easing cycle to start this year. The April 27 meeting seems too soon, but H2 is possible if current trends continue. Brazil also reports March current account data that same day. The most important driver for Brazil markets near-term is the Sunday impeachment vote (results not known yet).
Bank Indonesia meets Thursday and is expected to keep rates steady at 6.75%. It is in the midst of an easing cycle, but appears to be on hold now after it just announced that it will use the 7-day reverse repo rate as its new benchmark policy rate beginning in August. At 5.5%, this replaces the old benchmark 12-month reference rate at 6.75%. Officials stress that this is not a stealth easing. Rather, the new rate is meant to make monetary policy more effective because the 12-month reference rate really isn’t tied to money market rates.
Bank of Israel meets Thursday and is expected to keep rates steady at 0.10%. Rates have been kept steady since the last 15 bp cut back in February 2015. Yet deflation risks persist, with CPI at -0.2% y/y in February and well below the 1-3% target range. Despite market talk of unconventional measures, we think it would take a significant downturn in the economy for the bank to take them.
Mexico reports mid-April CPI Friday, which is expected to rise 2.74% y/y vs. 2.71% in mid-March. This is still in the bottom of the 2-4% target range. Barring another sharp swoon in the peso, the central bank is likely to remain on hold for the foreseeable future. Next policy meeting is May 5, no action is seen then.
Win Thin is a senior currency strategist with over fifteen years of investment experience. He has a broad international background with a special interest in developing markets. Prior to joining BBH in June 2007, he founded Mandalay Advisors, an independent research firm that provided sovereign emerging market analysis to institutional investors. He received an MA from Georgetown University in 1985 and a B.A. from Brandeis University 1983. Feel free to contact the Zurich office of BBH
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