Emerging Markets: Central Banks Ponder Rates

EM FX finished last week on a firm note. We believe that the broad-based dollar rally remains intact, but we could see a period of consolidation until the interest-rate backdrop becomes more positive for the dollar. The week after next holds the greatest potential, when the first prints for March start emerging and of course capped off with the Good Friday release of nonfarm payrolls. Weekly claims data for the March survey week came in firm, suggesting another strong jobs report for the month.

Commodity prices have yet to bottom, in our view. So with global growth (ex-US) still soft, commodities soft and US rates likely to head higher again, we view this current EM firmness as a correction within a longer-term bear market that remains intact.

Israel central bank meets today and is expected to keep rates steady at 0.10%. After the surprise 15 bp cut last month, we suspect the bank will take a wait and see approach for now. The weak shekel will be the main lever for stimulus now, but we wouldn’t rule out unorthodox measures if the need arises.

HSBC (LONDON:HSBA) reports flash China March PMI on Tuesday, expected at 50.4 vs. 50.7 final in February. Markets seem comfortable with the current economic trajectory in China. Data have been soft, but policymakers have been injecting periodic stimulus. Recent PBOC fixes support our view that there is no plan to significantly weaken the yuan.

Hungary central bank meets Tuesday and is expected to cut rates 20 bp to 1.90%. However, the market is split. Of the 19 analysts polled by Bloomberg, 2 see steady rates, 6 see a 10 bp cut, 8 see a 20 bp cut, and 2 see a 25 bp cut, and 1 sees a 30 bp cut. We believe rates will likely be cut to 1.5% over the next couple of months, but the pace is hard to forecast.

Mexico reports mid-March CPI Tuesday, expected at 3.02% y/y. Inflation was right at the 3% target in February, suggesting little pass-through yet from the weak peso. Banco de Mexico meets Thursday and is expected to keep rates steady at 3.0%. While it has signaled risks of a rate hike this year, we think one is unlikely unless the weak peso feeds into higher inflation. Mexico reports February trade Friday.

Brazil reports February current account data Wednesday, expected at -$8.3 bln. If so, the 12-month total would likely remain steady at the cycle high of -4.2% of GDP. FDI has remained fairly firm, but it may not be sustainable as the economic outlook worsens. Brazil reports Q4 GDP Friday, expected at -0.7% y/y vs. -0.2% in Q3. January monthly GDP proxy fell -1.75% y/y, pointing to more downside risks even as fiscal and monetary policy are still being tightened.

Taiwan central bank meets Thursday and is expected to keep rates steady at 1.875%. However, with the economy slowing, we think there is a risk that the bank moves to a more dovish stance later this year. Export orders contracted in February, and have been weakening for several months.

Philippine central bank meets Thursday and is expected to keep rates steady at 4.0%. The economy has remained pretty firm, but inflation of 2.5% in February is below the 3%-5% target range. The bank may move more dovish this year if the economy softens.

Czech central bank meets Thursday and is expected to keep policy steady. The forward guidance for keeping the EUR/CZK floor was just extended to “at least H2 2016” and so another shift so soon seems unlikely.

South Africa Reserve Bank meets Thursday and is expected to keep rates steady at 5.75%. However, it could provide important signals for the rest of the year. With inflation falling toward the bottom of its 3%-6% target range, the bank could move to a neutral or even dovish stance.