EM FX ended last week on a soft note, as some risk off sentiment crept back into the markets. The dollar gained broadly on Friday despite lower US rates as bonds rallied, the yen gained and equities sold off. Markit PMI for February Tuesday and FOMC minutes Wednesday could give the markets some further clues regarding Fed policy. We believe markets are underestimating the Fed’s capacity to tighten this year, which will eventually lead to stresses for EM.
Taiwan reports January export orders Monday, which are expected to rise 7.4% y/y vs. 6.3% in December. Q4 current account data will also be reported Monday. Taiwan reports January IP Thursday, which is expected to rise 2.7% y/y vs. 6.25% in December. The economic outlook is improving even as price pressures are rising. We believe the central bank will remain on hold at its next quarterly policy meeting in March.
Israel reports December manufacturing Monday. Data have been coming in strong, with GDP growing 6.2% annualized in Q4. Furthermore, inflation moved into positive territory in January for the first time since July 2014. All in all, the improving economic outlook supports our view that the central bank is unlikely to add any more stimulus via unconventional measures. However, we suspect it will continue to buy USD to prevent excessive shekel strength.
Russia reports January real retail sales Monday, which are expected at -5.1% y/y vs. -5.9% in December. The economy remains sluggish, but the 12.7% y/y jump in PPI for January will likely keep the central bank on cautious hold for now. Next policy meeting is March 24, and we see no move then.
Korea reports trade data for the first twenty days of February Tuesday. Bank of Korea meets Thursday and is expected to keep rates steady at 1.25%. CPI rose 2.0% y/y in January, right at the target. Low base effects suggest inflation will rise above target this year, which should keep the BOK leaning more hawkish.
Malaysia reports January CPI Wednesday, which is expected to rise 2.5% y/y vs. 1.8% y/y in December. While the central bank does not have an explicit inflation target, rising price pressures should keep Bank Negara leaning more hawkish. Next policy meeting is March 2, no change seen then.
Brazil reports mid-February IPCA inflation Wednesday. COPOM meets later that day and is expected to cut rates 75 bp to 12.25%. Brazil reports February IGP-M wholesale inflation and January central government budget data Thursday. Consolidated budget data will be reported Friday.
Colombia reports Q4 GDP Wednesday, which is expected to grow 1.4% y/y vs. 1.2% in Q3. The central bank then meets Friday and is expected to keep rates steady at 7.5%. However, the market is split. Of the 15 analysts polled by Bloomberg, 6 see a 25 bp cut and 9 see no cut. We lean towards a 25 bp cut after the bank delivered a hawkish surprise at the January meeting and kept rates steady.
Singapore reports January CPI Thursday, which is expected to rise 0.6% y/y vs. 0.2% in December. It then reports January IP Friday, which is expected to rise 8.0% y/y vs. 21.3% in December. MAS does not have an explicit inflation target, but rising price pressures and an improving economy should keep it on hold at its April policy meeting. Over the course of the year, MAS should lean more hawkish.
Poland central bank releases minutes from its last meeting Thursday. One MPC member has broached the possibility of a rate hike in 2017, ahead of the 2018 start that most believe. CPI rose 1.8% y/y in January, and low base effects are likely to push it above the 2.5% target this year. Next policy meeting is March 8, no change seen then.
Mexico reports mid-February CPI Thursday, which is expected to rise 4.72% y/y vs. 4.78% in mid-January. If so, this would be the first deceleration in several months. Banco de Mexico will also release minutes from its last meeting that same day, when it hiked rates 50 bp. In light of recent MXN strength and perhaps easing price pressures, the central bank would probably like to end its tightening cycle. Next policy meeting is March 30, and much will depend on the global backdrop.
Opinions expressed are solely of the author’s, based on current market conditions, and are subject to change without notice. These opinions are not intended to predict or guarantee the future performance of any currencies or markets. This material is for informational purposes only and should not be construed as research or as investment, legal or tax advice, nor should it be considered information sufficient upon which to base an investment decision. Further, this communication should not be deemed as a recommendation to invest or not to invest in any country or to undertake any specific position or transaction in any currency. There are risks associated with foreign currency investing, including but not limited to the use of leverage, which may accelerate the velocity of potential losses. Foreign currencies are subject to rapid price fluctuations due to adverse political, social and economic developments. These risks are greater for currencies in emerging markets than for those in more developed countries. Foreign currency transactions may not be suitable for all investors, depending on their financial sophistication and investment objectives. You should seek the services of an appropriate professional in connection with such matters. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete in its accuracy and cannot be guaranteed.
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