EM currencies are starting the week under pressure again from a broadbased dollar recovery. While expectations for a Fed lift-off remain in flux, the recent rebound in the dollar suggests that on a relative basis, the US economic and interest rate outlooks remain attractive.
This Friday will see the US jobs report, which could help clear up market expectations regarding the Fed. Lower commodity prices and slow global growth continue to be headwinds for EM, along with the prospects of higher US interest rates. We caution investors to remain defensive with regards to EM FX, though stocks are likely to benefit from the improved risk-on climate. We favor Asia over Latin America and EMEA.
Brazil reports its February central government budget data Monday, with the primary balance expected at -BRL2 bln vs. BRL10.4 bln in January. On Tuesday, the consolidated budget date will be reported, with the primary balance expected at BRL1.5 bln vs. BRL21.1 bln in January. February IP will be reported Wednesday, expected to contract -10.1% y/y vs. -5.2% in January. March trade will also come out Wednesday. We believe slow growth and rising interest rates will continue to pressure the fiscal accounts. Market is looking for one last 25 bp hike to 13% at the April 29 COPOM meeting, but much will depend on inflation and exchange rate developments this month.
Korea reports February IP Tuesday, expected at -1.8% y/y vs. +1.8% in January. It then reports March CPI Wednesday, expected to rise 0.4% y/y vs. 0.5% in February. BOK finally cut rates with a 25 bp move in March. We think easing will continue as inflation remains too low, but another move in April seems too soon. Korea will also report March trade Wednesday, with exports expected at -1.8% y/y and imports at -12.1% y/y. February current account will be reported Thursday. The external accounts are not an issue for Korea. Indeed, the rising surpluses are positive for the won, though this will be offset by worsening of the capital account.
Turkey reports Q4 GDP Tuesday, expected to rise 2.1% y/y vs. 1.7% in Q3. It also reports February trade, expected to remain steady at -$4.3 bln. March CPI will be reported Thursday, expected to rise 7.2% y/y vs. 7.55% in February. With inflation approaching the top end of the 3-7% target range, we expect the central bank to resume easing. It has been on hold since February, but is likely to cut rates modestly at its next policy meeting April 22. Government officials kept quiet after the bank’s decision to keep rates steady in March, which is a good sign.
South Africa reports February trade, expected at -ZAR6.0 bln vs. -ZAR24.2 bln in January. The fiscal balances have stopped deteriorating, but with the economy still sluggish, the situation remains fluid. At its March 26 meeting, the SARB sent mixed signals. It said that domestic economic conditions remain weak, with power constraints likely to persist for some time. However, Governor Kganyago said that there is not much scope for pausing normalization of policy any longer while saying that a rate cut was “out of the picture.” That seems to point to an imminent rate hike, but clearly, domestic conditions don’t really warrant such a move. Next policy meeting is May 21, let’s see how the economy develops over the next two months.
China reports official March manufacturing PMI Wednesday, expected at 49.7 vs. 49.9 in February. It will also report official non-manufacturing PMI at the same time, which stood at 53.9 in February. Later that day, HSBC (LONDON:HSBA) will report final March manufacturing PMI, expected at 49.3 vs. the 49.2 flash reading and 50.7 final in February. With both official and HSBC PMI readings staying under 50, markets will anticipate further PBOC easing ahead. Recent PBOC fixes for USD/CNY have been lower, confirming our belief that it was not aiming for continued one-way yuan weakness.
Thailand reports March CPI Wednesday, expected at -0.45% y/y vs. -0.52% in February. Core inflation is expected to rise 1.41% y/y vs. 1.45% in February. The BOT targets core inflation between 0.5-3.0%, and so has been reluctant to cut rates despite deflation in the headline measure. However, it finally cut rates 25 bp to 1.75% in March due to the weak economic outlook. Further easing is expected, but another move in April seems too soon. The economy is suffering in large part from the political uncertainty as martial law is nearing its one-year anniversary. There is talk that it may be lifted, but this would likely be accompanied by further measures to maintain strict control over dissent.
Indonesia reports March CPI Wednesday, expected at 6.40% y/y vs. 6.29% in February. Bank Indonesia would probably like to cut rates again, but rising inflation limits its room to maneuver right now. While BI delivered a dovish surprise with its 25 bp cut to 7.5% in February, another move may not be seen until later in Q2. Next policy meeting is April 14, and another cut then seems unlikely if inflation remains above the 3.5-5.5% target range.
Mexico reports March PMI Wednesday. Manufacturing component is expected at 51.0 vs. 50.7 in February, while the non-manufacturing component is expected at 50.0 vs. 49.6 in February. Last Friday, Banco de Mexico kept rates steady at 3.0%, as expected. However, the tone was on the dovish side, noting that the balance of risks for the economy had deteriorated and that the economy’s performance has been “somewhat weak.” It also noted that the weak peso has not had any second round impact on inflation. We think it will be hard for Banxico to justify a rate hike this year.
Czech Republic reports February retail sales Friday, expected to rise 6.5% y/y vs. 6.4% in January. The economic recovery remains solid, but policymakers remain concerned about deflationary risks. At the central bank’s policy meeting last week, Governor Singer warned that the odds of a shift higher in its EUR/CZK floor have risen. For now, this should be seen as verbal pushback to recent CZK firmness, but we would not rule out an actual shift if the floor is tested. The bank also repeated its existing forward guidance of maintain the cap until at least H2 2016.
Colombia central bank releases minutes from its March 20 policy meeting Wednesday, when it kept rates steady at 4.5%. Colombia then reports March CPI Friday, expected to rise 4.57% y/y vs. 4.36% in February. With inflation moving further above the 2-4% target range, the central bank is likely to remain on hold for the time being. Minutes are likely to affirm a hawkish bias near-term.
(from my colleagues Dr. Win Thin and Ilan Solot)