EM FX ended last week on a firm note despite the strong US jobs data, with the dollar succumbing to some “buy the rumor, sell the fact” price action. We think the dollar should recover as the week begins, as it seems risky to be short/underweight dollars going into the FOMC meeting. With the Fed poised to hike 3 or perhaps 4 times this year, we don’t think EM FX can continue to rally the way it has so far this year. Friday’s price action may be more about positioning than the fundamentals.
Turkey reports January current account Monday, which is expected at -$2.8 bln vs. -$4.3 bln in December. The central Bank meets Thursday and is expected to tighten policy with a 50 bp hike in the late liquidity window rate to 11.50%. Lately, the central bank has tightened by forcing banks to borrow at this window rather than at the overnight rate of 9.25%. We still think reliance on back door tightening reflects Erdogan’s heavy-handed tactics to prevent outright rate hikes.
China reports January-February retail sales and IP Tuesday. Because of Lunar New Year distortions, China bundles January and February together for these series. Retail sales are expected to rise 10.6% y/y while IP is expected to rise 6.2% y/y. For now, global markets appear to be very comfortable with the Chinese macro story.
India reports February WPI and CPI Tuesday. The former is expected to rise 6.10% y/y vs. 5.25% in January, while the latter is expected to rise 3.60% y/y vs. 3.17% in January. The economy appears to be recovering nicely from the shock November demonetization, while price pressures are picking up. As such, we think the RBI was right to signal the end of the easing cycle.
South Africa reports January manufacturing production Tuesday, which is expected to rise 1.6% y/y vs. -2.0% in December. It then reports January retail sales Wednesday, which are expected to rise 1.1% y/y vs. 0.9% in December. The economy remains sluggish, but elevated inflation is preventing the central bank from cutting rates. Next SARB meeting is March 30, and rates are likely to be kept steady at 7.0%.
Poland reports February CPI Tuesday, which is expected to rise 2.1% y/y vs. 1.8% in January. January trade and current account data will be reported Thursday. February industrial (2.7% y/y expected) and construction (flat y/y expected) output, PPI (4.6% y/y expected), and real retail sales (6.4% y/y expected) will be reported Friday. In light of rising inflation and a robust economy, we are surprised the central bank is sticking with its pledge to keep rates steady in 2017.
Mexico reports January IP Tuesday, which is expected at -0.4% y/y vs. -0.6% in December. The economy remains sluggish, but rising inflation is keeping the central bank in hawkish mode. The next policy meeting is March 30. It’s a tough call. The bank would probably like to put the tightening cycle on hold, but Fed rate hikes and potential global fallout may prevent this. Much will depend on external developments.
Colombia reports January retail sales and IP Tuesday. January trade will be reported Friday. Falling inflation and a sluggish economy led to the start of the easing cycle in December. The bank stood pat in January and cut another 25 bp in February. This pattern suggests no move at the next meeting on March 24. However, early surveys suggest the market is looking for another 25 bp cut then.
Czech Republic reports January retail sales, construction and industrial output Wednesday. Retail sales are expected to rise 7.4% y/y, while industrial output is expected to rise 8.0% y/y. Rising inflation and a robust economy should keep the CNB on track to exit the koruna floor before mid-year. The next policy meeting March 30 is too soon for an exit, but either the May 4 or June 29 meeting should be seen as “live.”
Hungary central bank releases its minutes on Wednesday. At the February meeting, it kept policy steady. Inflation is rising, so the minutes will be studied to see if the central bank is concerned enough to stop easing policy via unconventional measures. The central bank is due to review its cap on commercial bank deposits for end-Q2 (cap at HUF750 bln for end-Q1) at its next policy meeting March 28.
Bank Indonesia meets Thursday and is expected to keep rates steady at 4.75%. Deputy Governor Adityaswara said recently that it has cut rates “enough” to boost the economy, which supports our view that the easing cycle has ended. CPI rose 3.8% y/y in February and is likely to continue rising. February trade will be reported Friday, with exports expected to rise 15% y/y and imports by 13% y/y.
Chile central bank meets Thursday and is expected to cut rates 25 bp to 3.0%. CPI inflation eased to 2.7% y/y in February, below the 3% target for the fifth straight month. After the easing cycle started with a 25 bp cut to 3.25% in January, the central bank then stood pat in February. As such, we think it will cut again this month.