The Brexit vote is a game-changer for EM. While the direct impact on EM is limited, the damage to market sentiment is undeniable. And to make matters worse, there will be a protracted period of uncertainty as the UK and the EU negotiate the divorce proceedings. We do not think individual country stories will matter much in this new investment climate, where risk assets are likely to remain under broad-based selling pressures. We believe that Asia will outperform, while Latam and EMEA are likely to underperform.
Israel
Bank of Israel meets Monday and is expected to keep rates steady at 0.10%. Deflation persists, with CPI at -0.8% y/y, well below the 1-3% target range. Yet the central bank is hesitant to enact unconventional policies due to growing concerns about a housing bubble. For now, the weaker shekel will be very welcome by policymakers in terms of stimulating the economy.
Mexico
Mexico reports May trade data Monday, where a -$2.16 bln deficit is expected. Banco de Mexico meets Thursday and is expected to hike rates 25 bp to 4.0%. However, the market is split. Of the 15 analysts polled by Bloomberg, 7 see no change, 5 see a 25 bp hike, and 3 see a 50 bp hike to 4.25%. We see a close call, 50/50 odds between no hike and a 25 bp hike. The weak peso is obviously a concern, but the inflation pass-through has been minimal.
Brazil
Brazil’s central bank releases its quarterly inflation report Tuesday. This will be the first one prepared under Goldfajn, and will be very important in setting the tone for H2. We think rising price pressures and a weaker BRL could prevent a cut at the next COPOM meeting July 20. Brazil then reports June IGP-M wholesale inflation Wednesday, which is expected to accelerate to 12% y/y from 11.1% in May. Brazil also reports consolidated budget data for May Wednesday, with a primary deficit of –BRL17.1 bln expected. Brazil reports May IP Friday, which is expected at -8.1% y/y vs. -7.2% in April. Brazil also reports June trade Friday.
Korea
Korea reports May IP Thursday, which is expected at -0.1% y/y vs. -2.8% in April. It then reports June CPI Friday, which is expected to remain steady at 0.8% y/y. Korea will also provide the first glimpse of June trade on Friday, with both exports and imports expected at -11% y/y. The BOK’s 25 bp rate cut in June is unlikely to be “one and done” given continued weakness in the economy. Next policy meeting is July 14 and another cut is possible then.
Taiwan
Taiwan’s central bank meets Thursday and is expected to cut rates 12.5 bp to 1.375%. The economy is basically in recession, and so policymakers are likely to use both monetary and fiscal stimulus in the coming months.
South Africa
South Africa reports May money and private sector credit data Thursday. Both are expected to slow marginally. It also reports May trade and budget data Thursday. As previous rate hikes filter through the economy, we see further weakness ahead. The next SARB meeting is July 21. A lot can happen between now and then, but we think the decision will ultimately depend on how the rand is trading.
Czech Republic
The Czech National Bank meets Thursday and is expected to keep policy steady. This will be the last meeting under outgoing Governor Singer. Deflation persists, but we do not think that incoming central bank Governor Rusnok will be in any hurry to ease policy again. However, we suspect that any significant negative fallout from Brexit could delay the exit from the koruna cap, which is currently slated to end around mid-2017.
Poland
Poland reports June CPI Thursday, which is expected at -0.8% y/y vs. -0.9% in May. Deflation persists here as well, and some MPC members are starting to talk about further easing. This may intensify in light of the Brexit vote. Next policy meeting is July 6. This seems too soon for a move, but officials could start setting the stage for an eventual cut.
Chile
Chile reports May retail sales and IP Thursday. The former is expected to rise 3.4% y/y, while the latter is expected to rise 1.3% y/y. Unemployment is also seen rising to 6.7% from 6.4% in April. The economy is showing some signs of life, but remains vulnerable to lower copper prices. We think the tightening cycle is over for now. Next policy meeting is July 14, no change is seen then.
China
China reports official and Caixin June PMI readings Friday. The former is seen at 50.0 while the latter is seen at 49.1, both down marginally from May. Markets had been fairly comfortable with weak to stable Chinese data, but the new investment climate after Brexit may put an end to any complacency. The PBOC is likely to continue fixing USD/CNY higher if the current risk off sentiment continues to weigh on EM.
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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