Emerging Markets FX Update: Fears Of Scarcer Capital Build

Emerging market currencies remain under pressure at the start of the week. We continue to think that countries with poor fundamentals and high financing needs (twin deficits) will fare poorly as fears of scarcer global capital build ahead of the FOMC meeting next week.

Turkey reports Q1 GDP on Tuesday, and growth is expected to pick up to 2.3% y/y from 1.4% y/y in Q4. April current account will also be reported later today, and is expected to widen to-$8.1 bln from -$5.4 bln in March. Yesterday, April IP was reported at 3.4% y/y vs. expected 2.4% y/y and revised 1.3% y/y (was 1.4% y/y) in March. It appears that the economy is finally picking up a bit in 2013. After two straight months of dovish surprises, we think the central bank will stay on hold at the next meeting, June 18. USD/TRY is testing the 1.90 area again, and appears on track to break above this and test the 1.9225 high from December 2011. That is the all-time high, and so a break above would likely target round numbers at 1.95 and then 2.00. Support is seen near 1.88 and then 1.86.

India reports May CPI and April IP on Wednesday. CPI is seen slowing to 9.0% y/y from 9.4% y/y in April, while IP is seen decelerating to 2.3% y/y from 2.5% y/y in March. On Friday, India reports May WPI. Growth is picking up modestly, but remains sluggish overall. Falling price pressures should allow the RBI to continue easing modestly. The next meeting is June 19, and consensus is for steady policy. However, we think there is a small chance of a dovish surprise if CPI and WPI readings fall this week.

The RBI has intervened to limit rupee weakness, and with reserves near $290 bln, it still has a lot of room to maneuver. Further gains appear likely for USD/INR. The 58 area represents channel resistance dating back to September 2012 and a break above would be very negative. As we are already making new all-time highs, the next targets are all round numbers: 59.00, 59.50, and then 60.00. Support seen near 57.00 and then 56.00.

Hungary will report May CPI on Tuesday and it is expected at 1.9% y/y vs. 1.7% y/y in April. Central bank minutes will be released Wednesday. At that meeting, the bank cut rates by 25 bp to 4.5% and official comments suggest at least another 25-50 bp of further easing ahead. The bank's next policy meeting is June 25, and it is expected to cut another 25 bp to 4.25%. EUR/HUF is poised to test the 300 area, a break of which would target 303, 305, and then 310. Support seen near 295 and then 290. Despite some recent marginal improvement in the data, we believe the fundamentals should keep the forint underperforming near-term.

Mexico April IP due out Tuesday, expected at 5.3% y/y vs. -4.9% y/y in March. ANTAD retail sales for May come out on Wednesday, expected at -2.2% y/y vs. -3.2% y/y in April. Last Friday, the central bank kept rates steady at 4.0% after earlier reporting May CPI at a still-high 4.63% y/y, above the 2-4% target range. Banxico noted significant deceleration in growth, but in the past has highlighted the need for inflation to move back to target before easing policy. We think a cut in H2 is possible, but that will depend on the data. USD//MXN could retest the recent highs near 13.00, and a break above would target 13.30 and then 13.50. Support seen near 12.70 and then 12.80.

Brazil's April retail sales report is due out Thursday, expected at 3.7% y/y vs. 4.5% y/y in March. The monthly GDP proxy for April is due out Friday, expected at 7% y/y vs. 1.2% y/y in March. Q1 growth showed some improvement, so April data will be studied to see if the momentum is carrying over into Q2. USD/BRL continues to test the 2.15 area, but continued selling pressure on EM FX should see that pair break higher as we do not think the authorities will work that hard to protect that level in the face of generalized dollar strength. A break above would target 2.20, which is a key retracement objective of the 2008-2011 drop in USD/BRL. A break above 2.20 would target the 2.62 high from December 2008. Longer-term players are also likely eyeing the March 2009 high near 2.45.

Bank Indonesia holds a policy meeting Thursday, and is expected to keep rates steady at 5.75%. Inflation pressures may have stabilized, but remain high enough to keep the central bank’s hawkish tilt. A severe dollar shortage appears to be shaping up on-shore, which is very disappointing given Bank Indonesia’s previous dealings with this in recent years. Foreign reserves stood near $105 bln in May, down from the 2011 peak near $125 bln but still high enough for the central bank to help deal with the USD shortage. USD/IDR spiked to near 10,200, and until the authorities deal with the shortage, further gains are likely. The pair has not traded above 10,000 since 2009, but next targets ahead are the 10,309 retracement objective from 2009-2001 drop in USD/IDR, followed by 10,500.

The Philippine central bank holds a policy meeting Thursday, and is expected to keep rates steady at 3.5%. Inflation is falling and at 2.6% y/y is below the 3-5% target range. However, the economy remains very robust and so the central bank is likely to take a wait-and-see approach for now. USD/PHP is making new highs for this move, just below 43.00, and appears on track to test the 2012 high near 44.00. Support seen near 42.00 and then 41.50.

Bank of Korea holds a policy meeting Thursday, and is expected to keep rates steady at 2.5%. However, we do not think the May 25 bp cut was one and done; we're looking for another cut in Q3. Inflation is running at 1.0% y/y, well below the 2-4% target, while the economy remains very sluggish. Note that three nuclear reactors last week were suspended indefinitely for using forged safety certificates. At the end of last year, two other plants were closed for similar reasons. With seven other reactors out of service due to routine maintenance, the country has lost about a third of its electricity capacity. The government warned of "unprecedented shortages." This may be another headwind for the South Korean economy that could last the better part of the summer. USD/KRW appears likely to test the April high near 1145, and a break above would target the May 2012 high near 1185. Support seen near 1100 and then 1080.

Chile's central bank holds a policy meeting Thursday, and is expected to keep rates steady at 5.0%. With inflation still falling and the economy weakening, we think the easing cycle is likely to start soon, perhaps at the July 11 meeting. We think there is a small chance of a dovish surprise this week, but the weaker peso has removed some of the urgency to cut rates. Inflation of 0.9% y/y is well below the 2-4% target range. USD/CLP is making new highs for this move near 507 and appears on track to test the 2012 high near 523. Support seen near 500 and then 495.

Peru's central bank holds a policy meeting Thursday, and is expected to keep rates steady at 4.25%. Inflation has eased but at 2.5% y/y, it remains in the top end of its 1-3% target range. While the economy is showing some signs of slowing, Peru is holding up relatively better than Chile and so we do not see easing until later in Q3. USD/PEN is making new highs for this move just above 2.74, and appears on track to test the 2011 highs near 2.80 and then 2.84. Support seen near 2.70 and then 2.65.

Bank of Israel minutes came out Monday for the May meeting. Minutes showed the vote was 5-1 to cut 25 bp as a follow-up to the early May intra-meeting 25 bp cut. The lone dissenter wanted to keep rates steady. Since the intra-meeting cut, the central bank has also been intervening by buying USD for ILS, as it promised to do. Minutes suggest a dovish stance will remain in place and we think further cuts are likely. Next policy meeting is June 24, and no change in policy is expected then after two 25 bp cuts in May. We do see easing in Q3. Strong support seen near 3.60, and any moves below would likely bring on more FX intervention.