(from my colleague Dr. Win Thin)
EM FX ended last week on a firm not, led by a huge MXN rally on Inauguration Day. We believe that the peso rally was largely driven by positioning and technicals, and so we view Friday’s gains as a correction since the fundamental outlook remains unchanged. Indeed, we think the broader EM rally will be short-lived too, as US interest rates remain elevated. The 10-year yield flirted with the 2.5% level, and we believe it will eventually head even higher.
Several EM central banks meet this week, including Israel, Turkey, Hungary, South Africa, and Colombia. Of these, Turkey’s is the most important as we believe that a big rate hike is needed to help support the lira. Colombia is expected to continue its easing cycle with another 25 bp cut.
Singapore reports December CPI Monday, which is expected to rise 0.1% y/y vs. 0.0% in November. Low base effects should see the inflation rate move higher this year. It then reports Q4 unemployment and December IP (10.4% y/y expected) Thursday. Given rising inflation and an improving economy, we think the MAS will keep policy steady at its next semiannual meeting in April.
Taiwan reports December IP Monday, which is expected to rise 8.0% y/y vs. 8.8% in November. It then reports Q4 GDP Wednesday, which is expected to grow 3.2% y/y vs. 2.0% in Q3. Export orders have risen y/y for five straight months, suggesting the economy will continue to improve in H1.
Bank of Israel meets Monday and is expected to keep rates steady at 0.10%. Deflation should end this year, and so the bar for further easing remains very high. The economy is in decent shape, and so for now, a weaker shekel will remain the main lever of stimulus for policymakers.
Central Bank of Turkey meets Tuesday and is expected to hike the benchmark repo rate 50 bp to 8.50%. However, the market is truly split. Of the 22 analysts polled by Bloomberg, 4 see no change, 3 see a 25 bp hike, 8 see a 50 bp hike, 2 see a 75 bp hike, and 5 see a 100 bp hike. We think it will hike 50 bp, even though it SHOULD hike by 100 bp. The bank is also expected to hike the top of the rates corridor by 75 bp and the bottom by 25 bp.
Brazil reports December current account and FDI data Tuesday. Slow growth has limited import demand and narrowed the external deficits. While it appears that the current account deficit is set to widen out this month, FDI still covers nearly four times the gap.
National Bank of Hungary meets Tuesday and is expected to keep rates steady at 0.90%. Deputy Governor Nagy said the bank is still in easing mode, but added that the bank would wait until March to decide on whether to adjust its cap on 3-month deposits again. We think rising inflation will likely prevent further easing this year.
South African Reserve Bank meets Tuesday and is expected to keep rates steady at 7.0%. With CPI inflation accelerating to 6.8% y/y in December, it will be a closer call than we previously expected. Still, the bank is likely to wait until at least the March 30 to see if the CPI acceleration was an outlier or a new trend.
Mexico reports mid-January CPI Tuesday, and is expected to rise 4.14% y/y vs. 3.48% in mid-December. If so, this would be the highest since December 2014 and supports the case for further rate hikes. Next Banxico meeting is February 9, and another 50 bp hike then seems likely. ANTAD December retail sales will be reported Wednesday, which are expected to rise 6.9% y/y vs. 5.9% in November. December trade will be reported Thursday.
Korea reports Q4 GDP Wednesday, which is expected to grow 2.2% y/y vs. 2.6% in Q3. If so, this would be the slowest rate since Q2 2015. BOK board member Cho said the bank has room to cut rates further if the economic outlook deteriorates. Next policy meeting is February 23, and we think that the decision then will really depend on how the Q1 data come in.
The Philippines reports Q4 GDP Thursday, which is expected to grow 6.6% y/y vs. 7.1% in Q3. If so, this would be the slowest since Q4 2015. Yet price pressures are rising. CPI rose 2.6% y/y in December, the highest since December 2014 but still within the 2-4% target range. Low base effects should push the rate above the 3% target this year, which will keep the central bank in a hawkish mode.
Colombian central bank meets Friday and is expected to cut rates 25 bp to 7.25%. CPI inflation eased to 5.75% y/y in December, the lowest since September 2015. The economy remains sluggish, and so we expect an extended easing cycle in 2017.