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The Emerging FX Week Ahead

Published 06/23/2014, 01:54 PM
Updated 07/09/2023, 06:31 AM
The firmer than expected June HSBC flash China PMI (50.8 vs. 49.7 consensus) should help boost EM sentiment this week. This is the first reading for this series above 50 since December and fits in with our view that the mainland economy has stabilized, albeit at slower growth rates. We believe the global backdrop for EM remains constructive, and we look for the EM rally to continue in Q3.

Argentina reports Q1 GDP Monday, with growth expected at 0.5% y/y vs. 1.4% in Q4. More importantly, Argentina has a $900 mln bond payment coming due June 30 on restructured bonds. Due to the US lower court ruling that was upheld by the US Supreme Court, Argentina must make payments on the holdouts when making payments on the restructured bonds. If negotiations fail to yield a solution that allows that payment to be made on June 30, we do not think a default would lead to wider EM contagion. ARS should continue to weaken.

Turkey central bank meets Tuesday and is expected to cut rates 50 bp to 9.0%. With inflation still high and rising, this is a bit of a gamble. PPI inflation looks to have peaked in April, suggesting CPI may soon ease, but it’s too early to say all is well. To his credit, Erdogan has stopped publicly jawboning the central bank to ease. For USD/TRY, support seen near 2.10, resistance seen near 2.20.

Hungary central bank meets Tuesday and is expected to cut rates 10 bp to 2.30%. The recovery continues, but deflation risks remain in play and so some limited easing is still seen ahead. We don’t think rates will go below 2.0%, as base effects are likely to see the y/y CPI inflation rates tick up in H2. For EUR/HUF, support seen near 305 and then 302, resistance seen near 310.

Mexico reports mid-June CPI on Tuesday, with headline expected to rise 3.72% y/y and core expected to rise 3.06%. It then reports May trade on Friday. Minutes were released Friday from the May meeting where Banxico surprised markets with a 50 bp cut, and showed a 3-2 vote with the dissenters favoring no cut. Overall, we expect soft numbers to continue near-term, justifying the easing measures. However, we think it would take a significant leg lower in the economy to justify another rate cut. For USD/MXN, support seen near 13.00 and then 12.80, resistance seen near 13.10 and then 13.20.

Brazil reports May current account data on Tuesday, expected at -$6.6 bln. On Thursday, the central bank releases its quarterly inflation report and should try to support its decision to keep rates steady in May. On Friday, it reports June IGP-M wholesale inflation (expected to ease to 6.49% y/y from 7.84% in May) as well as May PPI. While inflation is falling at the wholesale and producer level, it is still rising at the consumer level. For now, the central bank is waiting for its previous hikes to take hold. For USD/BRL, support seen near 2.20, resistance seen near 2.25 and then 2.30.

Taiwan central bank holds its quarterly policy meeting Thursday and is expected to keep rates steady at 1.875%. May IP and sales data were a bit firmer than expected, but the recovery remains modest overall while price pressures remain limited. We see steady rates into 2015. For USD/TWD, support seen near 30.00 and then 29.80, resistance seen near 30.20.

Singapore reports May IP on Thursday, expected to rise 2.5% y/y vs. 4.6% in April. The economy is recovering, albeit modestly, and should keep the MAS on hold at its next policy meeting in October. Earlier Monday, June CPI came in at 2.7% y/y vs. 2.6% consensus. For USD/SGD, support seen near 1.2450, resistance seen near 1.2550 and then 1.2600.

Poland reports May retail sales on Thursday, expected to rise 6.2% y/y vs. 8.4% in April. May IP was weaker than expected, and suggests the central bank is right to be concerned about the economic outlook. Central bank minutes out Friday showed rising “uncertainty, particularly with respect to pace of economic recovery." This is not a surprise after Governor Belka highlighted potential easing risks at that meeting. Still, we don't expect a rate cut anytime soon, but the central bank shifted its stance pretty dramatically. For EUR/PLN, support seen near 4.15 and then 4.10, resistance seen near 4.18 and then 4.20.

Czech central bank meets Thursday and is expected to keep policy unchanged. The recovery continues, but deflation risks remain and so current loose policy is likely to be maintained into 2015. The EUR/CZK floor probably won’t be adjusted until 2015.

Korea reports May current account and IP on Friday. The external accounts have improved significantly, helping the won to outperform within EM. However, the real sector recovery remains modest, with IP seen rising only 0.5% y/y vs. 2.4% in April. We see steady rates for the rest of this year. For USD/KRW, support seen near 1015 and then 1000, resistance seen near 1030 and then 1040.

Chile releases central bank minutes on Friday. It has been on hold since the last 25 bp cut back in March, as inflation has gotten too high to allow for easing now even as the economy softens. Central bank President Vergara said Friday that inflation is likely to remain above 4% until November. However, he added that one or two more rate cuts are possible, perhaps in the next few months. For USD/CLP, support seen near 550 and then 540, resistance seen near 560 and then 570.

(from my colleague Dr. Win Thin)

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