EM assets are starting the week on a now familiar pattern: weaker currencies but stronger stock markets. The broad dollar rally is back in force, with the greenback pushing back against earlier cycle highs against many of the major currencies. This is taking a toll on EM currencies as well. Overall, we think this strong equity/weak currency trend is likely to continue for the near-term, albeit with some differentiation within EM.
In China for example, a sizable correction is bound to happen sooner or later after the parabolic rise in stocks in recent months. Although we still see the drivers for the rally remaining in place, the risk-reward doesn’t look so favorable in the short term. In Russia, we view the strong rally of the ruble as driven mostly by short-covering, and doubt foreign investors are committing any new funds. In Brazil, meanwhile, anti-government protests over the weekend were considerably smaller than the last one, but still enough to maintain the pressure.
Singapore reports advance Q1 GDP Tuesday, expected to rise 1.7% y/y (0.2% q/q) vs. 2.1% (4.9% q/q) in Q4. The MAS also holds its policy meeting on the same day. With the economy softening and deflation risks still present, we believe the MAS will ease policy by adjusting its S$NEER trading band. Last move was intra-meeting back in January, and the economic outlook has worsened since then. Singapore reports February retail sales Wednesday, expected to rise 3.0% y/y vs. -5.0% in January. March trade will be reported Friday, with NODX expected to contract -1.0% y/y vs. -9.7% in February.
Brazil reports February retail sales Tuesday, expected at -2.1% y/y vs. +0.6% in January. It reports mid-April IPCA inflation on Friday, expected to rise 8.14% y/y vs. 7.90% in mid-March. This is also up from March IPCA reading of 8.1% y/y, which should cement another 50 bp hike from COPOM to 13.25% on April 29. Deepening corruption allegations and more protests will keep political risk high. Taken along with worsening economic fundamentals, we think the real will move back to under-performing within EM, especially with the broad dollar rally back on track.
Colombia reports February retail sales and IP Tuesday. The former is expected to rise 5.3% y/y, while the latter is expected to contract -1.5% y/y. The peso has gained some traction recently, helped by firmer oil prices. However, we think the economic outlook remains weak, and that the central bank will move to a more dovish stance once inflation starts to ease. At 4.6% y/y and rising in March, it is above the 2-4% target range.
China reports March retail sales and IP as well as Q1 GDP Wednesday. Consensus for retail sales is at 10.9% y/y, for IP at 7.0% y/y, and for GDP at 7.0% y/y. March trade data was much weaker than expected, highlighting downside risks for this week’s data. Money and new loan data will come out sometime this week, but no date has been set. Soft China data will cement market expectations for more stimulus measures this year.
Bank Indonesia meets Tuesday and is expected to keep rates steady at 7.5%. We do think that the easing bias remains after its 25 bp cut in February started the cycle. However, inflation ticked up to 6.4% y/y in March and so the central bank may wait another month before cutting again. Indonesia reports March trade Wednesday, and should mirror weakness seen in other countries’ trade data. The economy is sluggish, and so we think the easing cycle will continue this year.
India reports March WPI Wednesday, expected at -2.05% y/y vs. -2.06% in February. March CPI came in lower than expected at 5.17% y/y, pointing to downside risks to WPI. The RBI kept rates steady at its April policy meeting, with Governor Rajan noting that commercial banks had not yet fully passed on previous easing. However, with price pressures so low, we believe the easing cycle will continue in 2015 at a modest pace.
South Africa reports February retail sales Wednesday, expected to rise 1.9% y/y vs. 1.7% in January. The economy remains sluggish, making it difficult for the SARB to normalize rates as it’s pledged to do. Next SARB meeting is May 21. Much will depend on how the data come in, but it’s possible that the central bank will soften its hawkish tone then.
The National Bank of Poland meets Wednesday and is expected to keep rates steady at 1.5%. Poland also reports March CPI that day, expected at -1.3% y/y vs. -1.6% in February. EUR/PLN is trading at levels not seen since 2011. Given deflationary risks, we don't think policymakers there are particularly happy about the firmer zloty. Further currency gains and ongoing deflation will raise the risk of further rate cuts. However, April may be too soon after the NBP delivered a 50 bp cut just last month. Another cut in Q2 seems pretty likely if current trends continue.
Israel reports March CPI, expected at -0.9% y/y vs. -1.0% in February. Deflation risks remain in place, but the central bank is close to its lower bound on rates after cutting 15 bp to 0.10% back in February. Unorthodox policies are possible if deflation risks deepen but for now, we think the weak shekel remains the main lever for stimulus.
Chile central bank meets Thursday and is expected to keep rates steady at 3.0%. Despite a more hawkish tilt in recent months, we think it will be hard for the central bank to justify a rate hike this year. At 4.2% y/y in March, CPI inflation is still falling from the peak reading of 5.7% in October. While it is still above the 2-4% target range, we don’t think recent economic trends support the bank’s hawkish tilt.
from my colleagues Dr. Win Thin and Ilan Solot