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EM Preview for the Week Ahead

The dollar got some traction against the majors towards the end of last week. This weighed on EM FX, with the high best currencies TRY, BRL, CLP, and ZAR leading the losers. We downplay risk of contagion from Turkey, but we acknowledge it will keep investors wary of the countries with poor fundamentals. Failure to pass the next stimulus bill in the US may weigh on sentiment as the week begins.

AMERICAS

Mexico reports June IP Tuesday. It is expected to rise 17.1% m/m but still contract -17.5% y/y. Banco de Mexico meets Thursday and is expected to cut rates. Markets are split between a 25 bp and 50 bp move. Last week, July CPI came in at 3.62% y/y, the highest since but still within the 2-4% target range. Furthermore, the peso remains relatively firm and so we favor a larger 50 bp cut to 4.5%.

Brazil COPOM minutes will be released Tuesday. Last week, it cut rates 25 bp to 2.0%, as expected, and left the door open to further easing. IPCA inflation picked up to 2.31% y/y in July, the highest since April but still below the 2.5-5.5% target range. June retail sales will be reported Wednesday, which are expected to rise 5.3% m/m vs. 13.9% in May. At this point, markets aren’t pricing in any further rate cuts but the economic outlook remains fluid and so we cannot rule it out entirely.

Colombia reports June manufacturing production and retail sales Thursday. The former is expected to contract -16.4% y/y and the latter by -11% y/y, both improving from May. Q2 GDP will be reported Friday and is expected to contract -16.3% q/q and -15.1% y/y. The economy is still at risk so the central bank is likely to continue easing. However, it slowed the pace to 25 bp in June and July and is likely to maintain that pace. Next policy meeting is August 28 and another 25 bp cut to 2.0% is expected.

Peru central bank meets Thursday and is expected to keep rates steady at 0.25%. CPI rose 2.15% y/y in July, the highest since August 2019 but still within the 1-3% target range. Local asset markets are likely to see some added volatility ahead after a congressional committee approved a bill allowing early pension withdrawals due to the pandemic. This follows similar moves in Chile and Brazil.

EUROPE/MIDDLE EAST/AFRICA

Hungary reports July CPI Tuesday. Inflation is expected to rise to 3.1% y/y from 2.9% in June. If so, it would be the highest since March but still within the 2-4% target range. At the last policy meeting July 21, the central bank cut rates 15 bp to 0.6%, as expected. It signaled a likely pause then, noting that “In the current rapidly changing environment, it is key to maintain short-term yields at a safe distance from a range close to zero.” Next policy meeting is August 25 and no change is expected then. Q2 GDP will be reported Friday and is expected to contract -11.0% q/q and -10.4% y/y.

South Africa reports June manufacturing production Tuesday. Production is expected to rise 30% m/m vs. -44.3% in May. Retail sales will be reported Wednesday, which are expected to rise 11.9% m/m vs. 74.2% in May. The SARB delivered a 25 bp cut to 3.5% last month. However, the bank signaled that the easing cycle may have ended, as its models see the policy rate at 3.5% at year-end. Also, the vote was 3-2 with the dissents in favor of staying on hold. Next policy meeting is September 17 and we think the situation is fluid enough to keep the chances of another cut alive.

Russia reports June trade and Q2 GDP Tuesday. The economy is expected to contract -9.6% y/y vs. +1.6% in Q1. The central bank delivered a smaller than expected 25 bp cut to 4.25% last month as inflation continues to tick up. Yet the economy remains weak and so the easing cycle is likely to continue, albeit at the new, slower rate. Next policy meeting is September 18 and another 25 bp cut to 4% is expected then.

Israel reports July trade Wednesday. July CPI will be reported Friday and is expected to fall -0.7% y/y vs. -1.1% in June. If so, deflation would be the lowest since April but still well below the 1-3% target range. At its last policy meeting July 6, the central bank expressed concern about the strong shekel. Since then, the currency has gained another 1% against the dollar. Next central bank policy meeting is August 24 and no change is expected then.

Czech Republic reports July CPI Thursday. Inflation is expected to fall to 3.2% y/y vs. 3.3% in June. If so, it would move back towards the 1-3% target range. Next central bank policy meeting is September 23 and no change is expected then. Since mid-May, the REER has gained nearly 3%, which according to the central bank’s model is equivalent to 75 bp of tightening. As such, we expect some pushback against the strong currency if this trend continues.

Poland reports June trade and current account data Thursday. Q2 GDP will be reported Friday, which is expected to contract -9.9% q/q and -9.0% y/y. Next central bank policy meeting is September 9 and no change is expected then. At its last meeting July 14, the bank offered a fairly upbeat outlook but offered no commitment to future policy either way. For now, we believe it is in wait and see mode.

Turkey reports June current account and IP Friday. A deficit of -$2.6 bln is expected. If so, the 12-month total would rise to -$10.7 bln, the highest since January 2019. After posting a year of surpluses, the current account has swung back into deficit and comes at a time when Turkey is struggling to attract foreign investment. Meanwhile, IP is expected to rise 9.0% m/m vs. 17.4% in May. Growth is likely to slow due to some policy changes last week. Backdoor tightening was seen as commercial banks were cut off from funding at the 8.25% 1-week rate, forcing them to borrow at the higher overnight rate of 9.75%. Regulators are also rolling back measures designed to boost bank lending.

ASIA

China reports July CPI and PPI Monday. The former is expected to rise 2.6% y/y while the latter is expected to fall -2.5% y/y. Money and loan data will be reported during the week, with new loans and aggregate financing expected to slow from June to CNY1.2 trln and CNY1.85 trln, respectively. Retail sales and IP will be reported Friday. Sales are expected to rise 0.1% y/y vs. -1.8% in June, while IP is expected to rise 5.1% y/y vs. 4.8% in June. It appears that the PBOC is shifting out of emergency mode and into sustainable recovery mode. As a result, we expect steady policy for the time being as the recovery progresses.

India reports June IP Tuesday. It is expected to contract -21.5% y/y. July CPI will be reported Wednesday and is expected to rise 6.40% y/y vs. 6.09% in June. If so, inflation would move further above the 2-6% target range. No wonder the RBI unexpectedly held rates steady last week instead of cutting 25 bp. If inflation stabilizes, we think the RBI will resume cutting at the next policy meeting October 1. WPI will be reported Friday and is expected to fall -1.1% y/y vs. -1.81% in June, which points to limited price pressures in the pipeline.

Malaysia reports Q2 GDP and current account data Friday. GDP is expected to contract -9.3% q/q and -10.1% y/y. Bank Negara cut rates 25 bp to 1.75% at its last meeting July 7 and warned of ongoing downside risks to the economy while leaving the door open for further easing. Next central bank policy meeting is September 10 and another 2 bp cut seems likely then.

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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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