Emerging Markets Outlook: Policy And Data

IPCA is seen rising to 6.8% y/y from 6.5% y/y in May and so still-high inflation and a softer real have markets looking for a 75 bp hike at its July 9/10 meeting. Swaps intervention on Friday did little to help the real, as it ended last week on a soft note and is trading soft to start the week off. Yesterday Brazil reported a larger trade surplus, which reflected a larger decline in imports than exports and the June PMI, which was unchanged at 50.4. For USD/BRL, support seen near 2.20 and then 2.18, resistance seen near 2.25 and then 2.2770

Some PMI readings for June have already come, but more readings will be coming out this week. China official and HSBC service sector PMIs will both come out Wednesday, and stood at 54.3 and 51.2 in May, respectively. Manufacturing PMI readings came out Monday and point to further weakness. While the markets continue to try deciphering the intentions of China policymakers, we do think markets need to brace for worse China economic numbers ahead. We see USD/CNY trading largely sideways in Q3.

Poland's central bank meets on Wednesday and is expected to cut rates by 25 bp to 2.5%. The economic data is stabilizing, but the downside risks to the economy remain strong and inflation is still falling. If the zloty is under strong selling pressures this week, we think there is a risk that the central bank stands pat. For EUR/PLN, support seen near 4.30 and then 4.20, while resistance seen near 4.35. Break of the June high near 4.37 would target the June 2012 high near 4.43.

Turkey June CPI is due out Wednesday, expected at 7.6% y/y after it ticked up to 6.5% y/y in May. Clearly, price pressures remain a bit too high for comfort but we do not expect a policy response. The central bank tightened liquidity within its rates corridor to help support the lira during the EM sell off, and then loosened liquidity last week as the markets stabilized. For USD/TRY, support seen near 1.90 and then 1.85, resistance seen near 1.95-1.96 area.