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EM Preview for the Week Ahead

EM FX took advantage once again of broad dollar weakness. Most EM currencies were up last week against the dollar, with the only exceptions being ARS, TRY, INR, THB, PEN, and MYR. We expect the dollar to remain under pressure this week and so EM should remain bid. However, the growing spread of the virus in Europe and the US supports our view that Asia is likely to continue outperforming.


Chile held a referendum Sunday on whether to draft a new constitution. Voters also voted if those changes would be drafted by newly elected assembly by a combined one of new and existing lawmakers. As of this writing, results have not been reported. However, polls suggest Chileans favor replacing the Pinochet-era constitution, which would most likely lead to several years of talks and uncertainty before it is promulgated. Central bank minutes will be released Friday. September unemployment, retail sales, and IP will also be reported Friday.

Mexico reports September trade data Tuesday. A surplus of $3.5 bln is expected vs. $6.1 bln in August. Q3 GDP will be reported Friday. It is expected to rise 11.9% q/q vs. -17.1% in Q2, with the y/y rate improving to -8.8% from -18.7% in Q2. Despite the weak economy, inflation accelerated to 4.09% y/y in mid-October, the highest since May 2019 and further above the 2-4% target range. Next Banco de Mexico policy meeting is November 12 and it will be a close call. We lean towards a 25 bp cut to 4.0% but it may pause and wait until the December 17 meeting to cut.

Brazil central bank meets Wednesday and is expected to keep rates steady at 2.0%. Mid-October IPCA inflation just came in at 3.52% y/y, the highest since mid-March but still in the bottom half of the 2.5-5.5% target range. Despite the bank’s dovish forward guidance, the CDI market is pricing in a hike at the December 9 meeting followed by more hikes in 2021. Central government budget data will be reported Thursday, with a primary deficit of -BRL79.7 bln expected. Consolidated budget data will be reported Friday, with a primary deficit of -BRL92.2 bln expected.

Colombia central bank meets Friday and is expected to keep rates steady at 1.75%. However, a handful of analysts look for another 25 bp cut to 1.50%. At its last policy meeting September 25, the bank cut rates 25 bp to 1.75% and said future decisions would be data dependent.  CPI rose 1.97% y/y in September, below the 2-4% target range for the third straight month. The data continue to come in weak and lower oil prices will add to the headwinds. As such, we see risks of a dovish surprise this week.


Turkey central bank releases its quarterly inflation report Wednesday. Last week, the bank hiked the Late Liquidity Window rate 150 bp to 14.75% but left the one-week repo rate unchanged at 10.25%. The hike in the LLW rate will allow for more backdoor tightening but the bank is really telling markets that it’s only reluctantly hiking. The weighted average cost of funding rose to 12.88% Friday as the bank struggles to limit lira losses. Next policy meeting is November 19 and an outright hike may be needed if the lira continues to weaken. September trade data will be reported Friday, with a deficit of -$4.9 bln expected vs. -$6.28 bln in August.

South Africa reports September CPI Wednesday. Headline inflation is expected at 3.0% y/y vs. 3.1% in August. If so, it would be the lowest since June and right at the bottom of the 3-6% target range. Next SARB policy meeting is November 19. While it has signaled steady rates ahead, we see risks of a dovish surprise then if the rand remains firm. September money and private sector credit data will be reported Thursday and both are expected to accelerate modestly from August. Trade and budget data will be reported Friday.

Poland reports October CPI Friday. Inflation is expected to remain steady at 3.2% y/y. Next central bank policy meeting is November 4. For now, the central bank has signaled steady rates. However, the economic outlook has darkened with the spreading outbreak of the virus. The second wave has forced authorities to tighten restrictions. Of note, President Dude has tested positive, joining Deputy Prime Minister Kaczynski as senior officials being infected.


China’s leadership meets in Beijing this week to formulate the 14th five-year plan that runs from 2021 through 2025. The final plan won’t be made public before being formally approved by the National People’s Congress in March. However, some details are likely to emerge in official state media before that. Observers expect President Xi to stress rebalancing of the economy away from exports and towards domestic consumption. China reports official October PMI readings Saturday local time. Manufacturing PMI is expected to remain steady at 51.5 while non-manufacturing is expected to rise a couple of ticks to 56.1. The mainland economy continues to power ahead, helping to boost regional trade and activity.

Korea reports Q3 GDP Tuesday. It is expected to rise 1.3% q/q vs. -3.2% in Q2, with the y/y rate improving to -1.9% from -2.7% in Q2. September IP will be reported Friday. It is expected to rise 3.9% m/m vs. -0.7% in August, with the y/y rate rising to 1.5% from -3.0% in August. October trade data will be reported Sunday local time. Exports are expected to contract -5.9% y/y vs. +7.6% in September, while imports are expected to contract -2.2% y/y vs. +1.6% in September. However, there are distortions due to fewer working days this year compared to last year. Next BOK policy meeting is November 26.

Hong Kong reports September trade Tuesday. Exports are expected to contract -0.4% y/y vs. -2.3% in August, while imports are expected to contract -1.7% y/y vs. -5.7% in August. Q3 GDP will be reported Friday. It is expected to rise 0.5% q/q vs. -0.1% in Q2, with the y/y rate improving to -5.9% from -9.0% in Q2. Investment inflows into the mainland via Hong Kong continue to keep USD/HKD pinned to the strong end of the 7.75-7.85 trading band. The HKMA continues to buy USD and can do this indefinitely with an endless supply of HKD. We see no change to the peg for the foreseeable future.

Taiwan reports Q3 GDP Friday. It is expected to grow 0.8% y/y vs. -0.58% in Q2. Taiwan continues to benefit from the recovery in mainland China. Lawmakers just approved a supplemental budget to fund virus relief measures. For now, any stimulus is likely to come form the fiscal side as the central bank is seen remaining on hold into 2021. Tensions with China are likely to rise in light of protests held in Taipei in support of arrested Hong Kong anti-government protestors. Protests were held in many cities around the world, but Taiwan is in a particularly sensitive position.

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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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