Breaking News

Emerging Market Headwinds Generate Easing (But Not Brazil)

By Marc ChandlerForexMay 29, 2013 12:10AM ET
Emerging Market Headwinds Generate Easing (But Not Brazil)
By Marc Chandler   |  May 29, 2013 12:10AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
(from my colleagues Dr. Win Thin and Ilan Solot)

EM countries are facing serious growth headwinds that favor more monetary easing ahead. Hungary and Israel have already cut rates this week, while Thailand and Colombia are likely to ease later this week. The one glaring exception is Brazil, where the central bank is expected to hike rates today. Most EM currencies remain under pressure. As long as the pace is measured and controlled, we believe policymakers are quite happy to see currency weakness.

The Bank of Thailand meets Wednesday, and is expected to cut rates 25 bp to 2.5%. If so, this would be the first cut since its 25 bp move back in October 2012. Resumption of the easing cycle is long overdue, but it seems that policymakers wanted to see how the economy fared after the distortions from the flooding played out. So far, it hasn’t been very uplifting, with consumption and investment slowing sharply in Q1 and IP actually contracting -3.8% y/y in April. Officials have cut export growth forecasts recently. Inflation continues to ease, with headline at a cycle low 2.4% y/y in April. More importantly, targeted core inflation is at its cycle low of 1.2% y/y, very near the bottom of the 0.5-3.0% target range. Officials are also signaling greater willingness to combat baht strength, and a rate cut will help here. USD/THB is trying to break above the 30 area, and a clean break would target 30.50 and then 31.00.

Brazil's central bank meets today, and consensus is a 25 bp hike to 7.75%. Brazil will also report May IGP-M wholesale inflation and Q1 GDP on Wednesday, followed by April budget data on Friday. Consensus for GDP growth is a pick up to 2.3% y/y from 1.4% y/y in Q4. Fiscal policy has been loosened even as inflation remains at the top of the 2.5-6.5% target range. This has fed into some calls for a 50 bp hike this week, including from us. USD/BRL traded at a new high for the year above 2.06 yesterday, and we do not think policymakers are unhappy with this bout of currency weakness. So far, the central bank has not come in with swaps to protect the 1.95-2.05 range, suggesting that it may not be in effect if the range is broken due to widespread dollar gains.

South Africa has a busy week ahead. Q1 GDP was reported yesterday much weaker than expected, rising only 0.9% annualized vs. 2.1% in Q4. April money and credit data, PPI and budget data are all due out Thursday, and April trade information is due out Friday. Though SARB left rates steady at 5.0% last week, as expected, we think that the macro backdrop it outlined sets the table for a rate cut in Q3. However, disinflation needs to get traction here like it has in the rest of the world before SARB can cut. The weak rand is also a factor, preventing any easing for the time being. Next SARB meetings are July 18 and September 19. USD/ZAR was making new highs for this move yesterday, nearing 9.80. Levels to look for ahead are 10.00, 10.50, and then the March 2009 high near 10.73.

Colombia's central bank meets Friday and is expected to keep rates steady at 3.25%. However, we think the risks of a dovish surprise are significant. The economy is still slowing, while inflation of 2.0% y/y is right at the bottom of the 2-4% target band. After cutting rates 50 bp in March, the central bank kept rates steady at the April 26 meeting. Officials should be happy with the weak peso, and a surprise cut now would go with the market momentum. USD/COP is making new highs for this move, near 1900, and a clean break above this area would target 1950.

India reports Q1 GDP on Friday. Growth is expected to pick up slightly to 4.8% y/y from 4.5% y/y, but remains slow enough to keep pressure on the RBI to ease further after it cut policy rates 25 bp in May. The next RBI meeting is June 17, and though RBI Governor Subbarao said recently that he sees little room for easing, continued disinflation may allow for one or two more rate cuts this year. USD/INR is having trouble breaking above 56, but a clean break would target the June 2012 high near 57.33.

This Saturday, China will report the official PMI reading for May. After the weak China HSBC PMI reported overnight, markets will be looking for a weak official PMI reading too. Official manufacturing PMI was 50.6 in April. HSBC PMI was below 50 from July 2011 through October 2012, with only October 2011 showing a reading above 50. During that same period, official PMI was below 50 only three months and so tends to overstate strength in China manufacturing. As such, it's possible that the official PMI reading comes in above 50 this month. But the softening in China growth is clear, and so any relief from the official PMI is likely to be fleeting. Indeed, official comments recently are clearly trying to prepare markets for slower China growth ahead. Yet USD/CNY is making new lows, confounding our expectations for a steady to weaker currency.

To recap, Israel’s central bank cut rates Monday by 25 bp to 1.25%. Consensus was for no move, but given the urgency of the intra-meeting cut in early May, the Monday cut was really not that surprising. We believe that the central bank will likely continue cutting rates under Fischer’s successor. USD/ILS is moving higher, albeit slowly, and made a new high for this move yesterday near 3.72. Next targets ahead are 3.75 and 3.80.

Also, Hungary’s central bank met yesterday and cut rates by 25 bp to 4.5%, as expected. The economic data have improved modestly, but not by enough to prevent further easing. HUF is defying gravity yet again, with EUR/HUF making new lows for this move near 285 today. Break below this level would target the 280 area. A Bloomberg survey has Hungary's policy rate bottoming at 4.25% this year, but we think it could go lower than that. The next central bank meeting is June 25, and we could easily see another cut then. The minutes from yesterday's meeting are due out June 12. Inflation continues to fall, and at 1.7% y/y is below the 2-4% target range. The forint has really firmed recently, and so the central bank will be able to ease again without having to worry about a weak exchange rate. This stands in contrast to South Africa, where high inflation and a weak currency are preventing the SARB from cutting rates now.
Emerging Market Headwinds Generate Easing (But Not Brazil)

Related Articles

Emerging Market Headwinds Generate Easing (But Not Brazil)

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Are you sure you want to delete this chart?
Write your thoughts here
Replace the attached chart with a new chart ?
Post also to:
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Post 1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email