Emerging Markets Preview: The Week Ahead

(from my colleagues Dr. Win Thin and Ilan Solot)

Brazil's government will report August budget data Monday, with the primary surplus expected at BRL1.6 bln vs. BRL2.3 bln in July. We think that if negative fiscal trends continue, Brazil runs the risk of a downgrade. S&P moved the outlook on its BBB rating from stable to negative back in June. Earlier Monday, the central bank released its quarterly inflation report, boosting its 2014 inflation forecasts. Market is pricing in a 50 bp hike October 8/9 followed by a 25 bp hike November 26/27 that would take the SELIC rate to 9.75%. Trade, IP, and PMI will also be reported this week. USD/BRL: retraced over 62% of its post-FOMC drop; retraced less than 38% of August-September drop, with major objectives near 2.2865, 2.3185, and 2.3505.

Korea reports September CPI on Tuesday, expected at 1.2% y/y vs. 1.3% y/y in August. September trade will also be reported Tuesday, and will be first glimpse of global trade for that month. Exports are expected to rise 2.5% y/y vs. 7.7% y/y in August. Low inflation and sluggish growth gives the BOK leeway to cut rates in Q4, especially if the won remains firm. USD/KRW: retraced about 38% of post-FOMC drop; barely retraced any of the August-September drop and remains near the September low around 1070.

Official China manufacturing PMI for September will be reported Tuesday, expected at 51.5 vs. 51.0 in August. HSBC final PMI for September was revised down to 50.2 vs. 51.2 flash and 50.1 in August. Hard landing fears have eased, but we do not expect a robust recovery. Neither does the market, with Bloomberg consensus for GDP growth at 7.7% y/y in Q3, 7.6% y/y in Q4, 7.5% y/y in Q1 2014, 7.45% y/y in Q2 2014, and 7.4% y/y in both Q3 and Q4 2014. USD/CNY: expected to continue trading sideways in the 6.10-6.15 range.

Thailand reports September CPI on Tuesday, expected at 1.56% y/y vs. 1.59% y/y in August. Real sector remains weak, with IP, consumption, and investment all contracting y/y in recent months. BOT next meets October 16. While no change is expected, we think the odds of a cut in Q4 are rising. USD/THB: retraced almost 50% of post-FOMC drop; retraced almost 38% of September drop, with next major objectives coming in near 31.49, 31.68, and 31.87.

Indonesia reports September CPI on Tuesday, which stood at 8.8% y/y in August. August trade is also due out Tuesday. Bank Indonesia next meets October 8, and there is a chance of another hawkish surprise then if price pressures remain high. USD/IDR: fully retraced post-FOMC drop; retraced 62% of September drop, with next major objective at the September 6 high near 11730.

Poland central bank meets Wednesday and is expected to keep rates steady at 2.5%. Governor Belka has signaled several times that rates have likely bottomed. Unless we see another leg lower in the economy, we see steady rates for the time being. EUR/PLN: fully retraced post-FOMC drop; retraced over 50% of September drop, with next major objective near 4.2470.

Turkey reports September CPI on Thursday, expected at 7.8% y/y vs. 8.2% y/y in August. August trade was reported earlier on Monday, and continues to show worsening external balances. Next central bank meeting is October 23. If the lira remains under pressure, it may have to hike the top of the rates corridor again. USD/TRY: fully retraced post-FOMC drop; retraced over 62% of September drop, with next major objective at the September 5 high near 2.0840