EM currencies are coming off a strong week, but the rally appears to be running out of steam as some are already giving back some of their recent gains. MXN has gained nearly 3% vs. USD over the past week, followed closely by INR (up 2%) and RUB (up 1.5%). Notable underperformers are IDR (down nearly 2% vs. USD), PHP (down 1%), and ZAR (down 0.5%).
We believe EM FX will find it hard to maintain traction ahead of the December 17/18 FOMC meeting. While we do not expect tapering then, markets are likely to be positioned defensively going into this meeting. Calendar considerations may also play a role in the coming days, with little incentive to load up on EM ahead of year-end.
China continues its November data deluge this week. Over the weekend, trade data was reported with exports up 12.7% y/y vs. 7.0% consensus and 5.6% in October. Imports rose 5.3% y/y vs. 7% consensus and 7.6% in October. China’s trade data is suspect, as Taiwan and Chile reported weak trade data today that follows weak trade reports from Korea and Brazil last week. Overnight, CPI was reported at 3.0% y/y vs. 3.1% consensus and 3.2% in October. IP and retail sales will be reported Tuesday, with both expected to ease a bit in terms of y/y growth. New yuan loans and aggregate financing should be reported sometime this week, with both expected to pick up a bit from October. USD/CNY broke below 6.08 to make a new low for this move, and we see yuan appreciation continuing into 2014.
South Africa reports October manufacturing (-2% y/y consensus) and Q3 non-farm payrolls (-0.1% y/y consensus) on Tuesday. On Wednesday, it reports November CPI (5.4% y/y consensus) and October retail sales (1.7% y/y consensus), followed by November PPI (6.1% y/y consensus) on Thursday. For USD/ZAR, support seen near 10.30 and then 10.00, while resistance seen near 10.50-10.60.
Korea central bank holds policy meeting Thursday and is expected to keep rates steady at 2.5%. We hold out a very small chance of a dovish surprise, as inflation remains well below target and the economy remains sluggish. Add in a strong currency, and one can certainly justify a rate cut. USD/KRW has broken lower and is likely to test support near 1050. The moves lower are likely to remain a slow grind, as BOK is expected to continue intervening. Resistance seen near 1060 and then 1080. The JPY/KRW cross is making new lows for this move, inching closer to the key 10 area.
Indonesia central bank holds policy meeting Thursday and is expected to keep rates steady at 7.5%. However, with USD/IDR making new highs above 12000 last week, we think there is a small chance of a hawkish surprise. Indeed, BI has delivered several hawkish surprises this year, due mostly to a weak rupiah and rising inflation. Inflation is stabilizing around 8.4% y/y, but remains well above the 3.5-5.5% target. For USD/IDR, resistance seen near 12000 and then 12500, while support seen near 11500 and then 11000.
Philippines central bank holds policy meeting Thursday and is expected to keep rates steady at 3.5%. Inflation, which troughed in August at 2.1% y/y, has trended higher for three straight months to 3.3% y/y in November. This is back within the 3-5% target range, but still near the bottom. Core inflation has also been accelerating. With the economy still pretty firm, we see no need to change policy for the time being. For USD/PHP, resistance seen near 44.50 and then 45.00, while support seen near 43.50 and then 43.00.
Brazil reports October retail sales (5.8% y/y consensus) Thursday. It will report monthly GDP proxy for October (2.2% y/y consensus) on Friday. The real outperformed during the last half of last week, helped by Tombini’s announcement that BCB would extend its intervention program, albeit with some possible (unspecified) modifications. For USD/BRL, support seen near 2.30 and then 2.25, while resistance seen near 2.40 and then 2.45.
India reports November CPI (10% y/y consensus) and October IP (-1.2% y/y consensus) on Thursday. The economy continues to suffer from a combination of high inflation and sluggish growth, but at least the rupee has stabilized. RBI next meets December 18, and Governor Rajan has delivered rate hikes at his first two meetings in September and October. There is a case for another hike, but with the rupee holding up well, the RBI is likely to stand pat this month. Indian markets rallied on opposition BJP victory in weekend state elections, which suggests a new and market-friendly government in national elections next year. For USD/INR, support seen near 61.00 and then 60.00, while resistance seen near 62.00 and then 64.00.
Chile central bank holds policy meeting Thursday and is expected to keep rates steady at 4.5%. Last Friday, November CPI was reported at 2.4% y/y vs. 2.1% consensus and 1.5% in October. Low base effects played a role, but the spike in inflation back into the 2-4% target range is likely to keep the bank on hold this month. Minutes from the last meeting showed a unanimous vote to cut 25 bp, but revealed that keeping rates on hold was also discussed. For USD/CLP, support seen near 525 and then 520, while resistance seen near 530 and then 535.
Peru central bank holds policy meeting Thursday and is expected to keep rates steady at 4.0%. Inflation moved (barely) back into the 1-3% target range, coming in at 2.96% y/y in November. As such, we think there is a small chance of a dovish surprise cut this week after the central bank cut rates by 25 bp to 4% in November. If no move seen this week, then we think there is scope for further easing in early 2014. For USD/PEN, support seen near 2.75 while resistance seen near 2.80 and then 2.85.
(from my colleague Dr. Win Thin)