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EM Preview for the Week Ahead

EM FX was mixed last week, with most risk assets continuing to fight a tug of war between improving economic data and worsening virus numbers. Sentiment may be hurt early this week over lack of consensus in the EU and the US regarding further fiscal stimulus. Three of the four EM central banks meeting this week are expected to cut rates.

AMERICAS

Mexico reports mid-July CPI Thursday. Headline inflation is expected at 3.55% y/y, up from3.17% in mid-June. If so, it would be the highest since February and nearing the top of the 2-4% target range. At the last policy meeting June 25, the central bank cut rates 50 bp to 5.0% and signaled potential for further easing. Next COPOM meeting is August 13 and another 50 bp cut to 4.5% is likely then.

Brazil reports mid-July IPCA inflation Friday. Headline inflation is expected at 2.37% y/y, up from1.92% in mid-June. If so, it would be the highest since April and almost back within the 2.5-5.5% target range. At the last COPOM meeting June 17, the central bank cut rates 75 bp to 2.25% and signaled potential for one final cut. Next COPOM meeting is August 5 and the CDI market is currently pricing in about a 50% chance of a 25 bp cut to 2.0%.

EUROPE/MIDDLE EAST/AFRICA

Poland reports June industrial output and PPI Monday. Output is expected to contract -6.9% y/y vs. -17.0% in May, while PPI is expected to fall -1.0% y/y vs. -1.5% in May. Real retail sales will be reported Tuesday, which are expected to contract -3.0% y/y vs. -7.7% in May. The central bank left policy on hold last week and did not hold a press conference for the fifth straight meeting. In its policy statement, the bank reiterated that the recovery would be helped by a weaker zloty. Next policy meeting is September 9.

National Bank of Hungary meets Tuesday and is expected to cut rates 15 bp to 0.60%. At its last meeting June 23, the bank unexpectedly cut the policy rate 15 bp to 0.75% but framed it as fine-tuning policy. Minutes show it was a unanimous decision. Since then, June inflation accelerated to 2.9% y/y, the highest since March but still below the 3% target and within the 2-4% target range. If price pressures continue to rise, we do not the bank will be able to ease much more after this week.

Turkey central bank meets Thursday and is expected to keep rates steady at 8.25%. The bank surprised markets last month with steady rates when a 25 bp cut was expected, but inflation has been accelerating. Since then, July CPI came in higher than expected at 12.62% y/y, the highest since August 2019. As much as we’re sure it pains Erdogan, the central bank is finally showing a modicum of conventional thinking here by keeping rates steady until the inflation outlook improves.

South Africa reports May retail sales Wednesday. Sales are expected to contract -25.5% y/y vs. +2.7% in March. SARB meets Thursday and is expected to cut rates 25 bp to 3.5%. However, the market is split. Of the 11 analysts polled by Bloomberg, 4 see no cut, 4 see a 25 bp cut, and 3 see a 50 bp cut. The bank cut 50 bp at the last meeting in May. Since then, inflation fell to 2.1% y/y in June, the lowest since September 2004 and below the 3-6% target range. With the rand relatively firm, we see risks of a dovish surprise this week from the SARB.

Central Bank of Russia meets Friday and is expected to cut rates 50 bp to 4.0%. However, the market is split. Of the 22 analysts polled by Bloomberg, 5 see no cut, 6 see a 25 bp cut, and 11 see a 50 bp cut. The bank delivered a 100 bp at the last meeting June 17. Since then, June inflation accelerated to 3.2% y/y, the highest since November but still below the 4% target.

ASIA

Taiwan reports June export orders Monday. Orders are expected to rise 1.2% y/y vs. 0.4% in May. June IP will be reported Thursday and is expected to rise 2.35% y/y vs. 1.51% in May. The economy seems to be benefiting from the recovery on the mainland, though the pace is clearly modest. However, the pace is modest and so we cannot rule out another rate cut at the central bank’s next quarterly meeting in September.

Korea reports trade data for the first 20 days of July Tuesday. Q2 GDP will be reported Thursday and is expected to contract -2.0% y/y vs. +1.4% in Q1. In q/q terms, GDP is expected to fall -2.3% vs. -1.3% in Q1. Bank of Korea just left rates steady at 0.50% last week, whilst reiterating that it could add stimulus via asset purchases in the future, if needed. Next policy meeting is August 27 and is likely to remain on hold.

Malaysia reports June CPI Wednesday. Deflation is expected to ease slightly to -1.8% y/y from -2.9% in May. Bank Negara does not have an explicit inflation target, but deflationary conditions should allow it to cut rates again. Last move was a 25 bp cut July 7 to 1.75%. Next policy meeting is September 10 and another cut is expected.

Singapore reports June CPI Thursday. Headline is expected to fall -0.6% y/y vs. -0.8% in May. Monetary Authority of Singapore does not have an explicit inflation target, but deflationary conditions should allow it to ease again. Last move in March, when the MAS reduced the slope of the S$NEER trading band to zero and re-centered it at the prevailing level. Next semi-annual policy meeting is in October. June IP will be reported Friday and is expected to contract -2.6% y/y vs. -7.4% in May.

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About Win Thin
Win Thin
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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