In the EM space, disinflation and slow growth remain major themes for most of the countries. Certainly, weaker Chinese readings have gotten the headlines but the malaise is spreading well beyond Asia.
Yesterday, it was Chile that reported Q1 GDP growth at a much weaker than expected 4.1% y/y, down sharply from 5.7% y/y in Q4. Others in EM are likely to report slower growth and disinflation this week, setting the stage for more stimulus ahead. Brazil is the major exception, and is discussed below.
South Africa: April CPI is due out Wednesday, and is expected to ease to 5.7% y/y from 5.9% y/y in March. On Thursday, the SARB meets and is expected to keep rates steady at 5%. However, if disinflation continues as it has in the rest of the world, we think a rate cut by the SARB will be seen in Q3 in order to help address the slowdown.
Gold prices continue to fall, down 8 straight days and 10 out of the past 11. Falling gold is part of the reason behind the ZAR selloff last week, along with labor unrest. Besides these usual themes hurting the rand, we got a bonus yesterday with bearish bank news.
The biggest provider of unsecured loans saw its shares plunge after it increased H1 2013 credit impairment charges by 45%. This is most certainly reflecting rising bad loans from high unemployment and slow growth. USD/ZAR made a new high for this move yesterday just shy of 9.50, a level not seen since April 29. Further rand losses appear likely as technicals point to a potential test of the March 2009 high near 10.73.
HSBC China flash PMI for May is due out Thursday, and stood at 50.4 final in April. This will be the first snapshot for May, and the risks are to the weak side. We note that in April, the surveys data (PMIs) were weaker than expected while the real sector data (loans, trade) were largely stronger than expected.
With the rest of the world slowing, we think it will be hard for China to defy gravity and we look for continued sluggishness in Q2 and Q3. Last week, the PBOC finally fixed USD/CNY higher after a long string of lower fixes. However, Friday saw a significantly lower fix followed by a virtually flat fix yesterday and so the near-term direction is a bit cloudy.
Mexico mid-May CPI is due out Wednesday, and is expected steady at the 4.72% y/y pace reported for mid-April. Core is seen easing slightly to 2.85% y/y from 3.0% y/y in mid-April. The real sector data has been unequivocally soft in Q2, and this has fed into rate cut expectations. However, Carstens has for now ruled out any easing until inflation returns to the 2-4% target range.
The next Banxico meeting is June 7 and that is clearly too soon to act. Even the July 12 meeting is likely to soon, as we think officials will also want to gauge if the Q2 slowdown carries over into Q3. As such, we think the September 6 meeting offers the best chance of a rate cut, if the data continue to come in soft in Q3 as well. The peso has been hurt by a combination of generalized EM currency weakness coupled with weak local data and weak US data.
While we believe the US is only going through a soft patch, USD/MXN is likely to remain bid near-term, and a break above 12.40 would open up a test of the 12.60 area. Support seen near 12.20 and then strong support near 12.00.
Singapore reports April IP and CPI on Thursday. IP is seen at 1.2% y/y vs. -4.1% y/y in March, while CPI is seen at 3.0% y/y vs. 3.5% y/y in March. Real sector data has been coming in weak, while Singapore is experiencing disinflation just like the rest of the world. If these trends continue as we expect, we believe that the MAS will ease policy at its October meeting by shifting the slope of its undisclosed S$NEER to a neutral stance.
The MAS currently has a policy of “modest” appreciation. In light of the EM sell-off last week, USD/SGD spiked to test the 1.26 area and traded at its highest since July 2012 before falling back a bit yesterday. Despite strong fundamentals, SGD will remain subject to market forces that have hurt EM currencies across the board. The yen in particular has had a strong influence on regional Asian currencies, and we think that will continue. A break of the 1.2660 area would set up a test of the June 2012 highs near 1.2970. Support seen near 1.25.
Brazil is the major exception in EM with regards to disinflation. Mid-May IPCA inflation is due out Wednesday, and is expected at 6.49% y/y vs. 6.51% y/y in mid-April. Price pressures are slowly turning lower, with IGP-M wholesale measure at 7.3% y/y in April vs. the 8.3% y/y peak in February, and preview readings point to a May rate near 6.2% y/y. Consumer inflation still remains at the top of the 2.5-6.5% target band and is high enough for the central bank to have to act, however.
The next COPOM meeting is May 28/29, and another 25 bp rate hike to 7.75% is expected. USD/BRL traded with a 2.04 handle on Friday, the first time since January 23, before falling back a bit yesterday. Still no intervention from BCB, which twice this year has offered swaps to support the real when USD/BRL was trading near current levels. If BRL weakness continues due to inflation concerns, it may be time to send a friendlier signal to the markets with a stronger accompanying statement on May 29. So far, officials have appeared quite reluctant to tighten.
Yesterday, it was Chile that reported Q1 GDP growth at a much weaker than expected 4.1% y/y, down sharply from 5.7% y/y in Q4. Others in EM are likely to report slower growth and disinflation this week, setting the stage for more stimulus ahead. Brazil is the major exception, and is discussed below.
South Africa: April CPI is due out Wednesday, and is expected to ease to 5.7% y/y from 5.9% y/y in March. On Thursday, the SARB meets and is expected to keep rates steady at 5%. However, if disinflation continues as it has in the rest of the world, we think a rate cut by the SARB will be seen in Q3 in order to help address the slowdown.
Gold prices continue to fall, down 8 straight days and 10 out of the past 11. Falling gold is part of the reason behind the ZAR selloff last week, along with labor unrest. Besides these usual themes hurting the rand, we got a bonus yesterday with bearish bank news.
The biggest provider of unsecured loans saw its shares plunge after it increased H1 2013 credit impairment charges by 45%. This is most certainly reflecting rising bad loans from high unemployment and slow growth. USD/ZAR made a new high for this move yesterday just shy of 9.50, a level not seen since April 29. Further rand losses appear likely as technicals point to a potential test of the March 2009 high near 10.73.
HSBC China flash PMI for May is due out Thursday, and stood at 50.4 final in April. This will be the first snapshot for May, and the risks are to the weak side. We note that in April, the surveys data (PMIs) were weaker than expected while the real sector data (loans, trade) were largely stronger than expected.
With the rest of the world slowing, we think it will be hard for China to defy gravity and we look for continued sluggishness in Q2 and Q3. Last week, the PBOC finally fixed USD/CNY higher after a long string of lower fixes. However, Friday saw a significantly lower fix followed by a virtually flat fix yesterday and so the near-term direction is a bit cloudy.
Mexico mid-May CPI is due out Wednesday, and is expected steady at the 4.72% y/y pace reported for mid-April. Core is seen easing slightly to 2.85% y/y from 3.0% y/y in mid-April. The real sector data has been unequivocally soft in Q2, and this has fed into rate cut expectations. However, Carstens has for now ruled out any easing until inflation returns to the 2-4% target range.
The next Banxico meeting is June 7 and that is clearly too soon to act. Even the July 12 meeting is likely to soon, as we think officials will also want to gauge if the Q2 slowdown carries over into Q3. As such, we think the September 6 meeting offers the best chance of a rate cut, if the data continue to come in soft in Q3 as well. The peso has been hurt by a combination of generalized EM currency weakness coupled with weak local data and weak US data.
While we believe the US is only going through a soft patch, USD/MXN is likely to remain bid near-term, and a break above 12.40 would open up a test of the 12.60 area. Support seen near 12.20 and then strong support near 12.00.
Singapore reports April IP and CPI on Thursday. IP is seen at 1.2% y/y vs. -4.1% y/y in March, while CPI is seen at 3.0% y/y vs. 3.5% y/y in March. Real sector data has been coming in weak, while Singapore is experiencing disinflation just like the rest of the world. If these trends continue as we expect, we believe that the MAS will ease policy at its October meeting by shifting the slope of its undisclosed S$NEER to a neutral stance.
The MAS currently has a policy of “modest” appreciation. In light of the EM sell-off last week, USD/SGD spiked to test the 1.26 area and traded at its highest since July 2012 before falling back a bit yesterday. Despite strong fundamentals, SGD will remain subject to market forces that have hurt EM currencies across the board. The yen in particular has had a strong influence on regional Asian currencies, and we think that will continue. A break of the 1.2660 area would set up a test of the June 2012 highs near 1.2970. Support seen near 1.25.
Brazil is the major exception in EM with regards to disinflation. Mid-May IPCA inflation is due out Wednesday, and is expected at 6.49% y/y vs. 6.51% y/y in mid-April. Price pressures are slowly turning lower, with IGP-M wholesale measure at 7.3% y/y in April vs. the 8.3% y/y peak in February, and preview readings point to a May rate near 6.2% y/y. Consumer inflation still remains at the top of the 2.5-6.5% target band and is high enough for the central bank to have to act, however.
The next COPOM meeting is May 28/29, and another 25 bp rate hike to 7.75% is expected. USD/BRL traded with a 2.04 handle on Friday, the first time since January 23, before falling back a bit yesterday. Still no intervention from BCB, which twice this year has offered swaps to support the real when USD/BRL was trading near current levels. If BRL weakness continues due to inflation concerns, it may be time to send a friendlier signal to the markets with a stronger accompanying statement on May 29. So far, officials have appeared quite reluctant to tighten.