Emerging Markets: Preview for the Week Ahead

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

Turkey central bank meets Tuesday and consensus sees it keeping policy rates steady.  We think that the chance of a surprise rate hike is higher than what the market is pricing in, but still smaller than 50%.  The benchmark repo rate is at 4.50% and overnight lending rate at 7.75%.  We see a realistic possibility that the TCMB will raise just the overnight lending rate, which has become the de facto policy rate and currently serves as the top of its 3.5-7.75% rates corridor.  They could also increase their FX intervention program or try to tweak their baroque Reserve Option Mechanism further to try to get banks to keep more of their required reserves in dollars.  In any case, none of these measures (bar a hike in the overnight lending rate) are likely to make a material difference for Turkish assets.  The ideal would be a surprise rate hike across the board.  For USD/TRY, there is an upward sloping channel for USD/TRY dating back to 2009, and the top currently comes in near 2.28.  Support seen near 2.20.

Hungary central bank meets Tuesday and is expected to cut rates 10 bp to 2.9%.  A handful of analysts are looking for 15-20 bp of easing.  December CPI came in as expected at 0.4% y/y vs. 0.9% in November.  Latest central bank minutes suggest rate cuts to continue this year, but at a slower pace.  Two voted for a 10 bp cut at the December 17 meeting, while the majority voted for 20 bp.  But those voting for 20 bp agreed that it may need to slow the pace.  With the economy moving closer to outright deflation, we think easing continues over the next few months.  For EUR/HUF, support seen near 300 and then 298 while resistance seen near 302 and then 304.

Poland reports December IP and PPI on Tuesday and are expected at 10.5% y/y and -1.1% y/y, respectively.  On Thursday, central bank minutes will be released.  Friday, December retail sales (expected at 7% y/y) and unemployment (expected at 13.5%) will be reported.  December CPI came in as expected at 0.7% y/y vs. 0.6% in November, while core CPI eased to 1.0% y/y from 1.1%.  The bank left rates steady last week at 2.5%, as expected.  It kept guidance for steady rates to mid-year, and noted high unemployment will curb wage and price pressures.  We think risks are tilted to rates staying steady even later than mid-year, not before.  The real sector is improving, but we see little need for imminent tightening.  For EUR/PLN, support seen near 4.15 while resistance seen near 4.20.

Bank of Thailand meets Wednesday and is expected to cut rates 25 bp to 2.0%.  This would follow its surprise 25 bp cut to 2.25% at its last meeting November 27.  To us, the only surprise then was that they waited so long, as the economy had been softening since mid-2013.  Core CPI rose only 0.9% y/y in December, which remains perilously close to the bottom of the 0.5-3.0% target range.  Headline CPI rose 1.7% y/y in December, just above the cycle trough of 1.4% in September. With the economy tipping very close to outright deflation, we think BOT will continue easing in the coming months, especially as it appears that the protests are taking a further toll on an already weak economy.  For USD/THB, support seen near 32.50 while resistance seen near 33.00 and then 33.50.  

South Africa reports December CPI on Wednesday, expected at 5.5% y/y vs. 5.3% in November.  The economy is soft across the board, and with inflation staying in the 3-6% target range (for now, at least), we think the markets are wrong to be positioned for SARB rate hikes this year.  At the very least, steady rates will be seen but we think the risks are tilted towards easing, not tightening.  Money and credit growth continued to slow in November to cycle lows, pointing to slower activity ahead.  For USD/ZAR, support seen near 10.75 and then 10.50, while resistance seen near 11.00 and then 11.50.

Korea reports Q4 GDP on Thursday, expected at 3.9% y/y vs. 3.3% in Q3.  On a q/q basis, consensus is for 0.9% vs. 1.1% in Q3.  Bank of Korea holds kept rates steady this month at 2.5%, as expected.  Headline CPI rose 1.1% y/y in December, down from 1.2% in November.  However, core CPI is elevated, rising 1.9% y/y in December vs. 2.0% in November.  Even though headline is below the 2.5-3.5% target, the rise in core should keep BOK on hold for now. The won has finally seen some catch up weakness this month, pushing the JPY/KRW cross back above 10.  For USD/KRW, support seen near 1060 and then 1050, while resistance seen near 1070 and then 1080.

HSBC flash China manufacturing PMI will be reported Thursday, expected at 50.4 vs. 50.5 final reading in December.  We think China data will be largely market-neutral for now, as market pretty much accepting slower growth ahead.  Bloomberg consensus for China annual growth is 7.7% in 2013, 7.5% in 2014, and 7.2% in 2015.  We see USD/CNY trading largely within the recent 6.04-6.08 range for now.

Singapore reports December CPI on Thursday, expected at 2.0% y/y vs. 2.6% in November.  It also reports December IP on Friday, expected at -1.7% y/y vs. +4.0% in November.  December data so far is mixed, with NODX stronger than expected even as PMI came in weak at 49.7 vs. 51.0 consensus and 50.8 in November.  This is the first sub-50 reading since February 2013, and points to weakness ahead as several components fell below 50, including production and employment.  Forward-looking new orders and new export orders fell to 50.3 and 50.5, respectively, and could eventually tip below 50 as well.  MAS decision to keep policy steady in October (at a tightening stance) will likely put a damper on growth this year.  For USD/SGD, support seen near 1.2700, while resistance seen near 1.2800 and then 1.2850. 

Brazil reports mid-January IPCA inflation on Thursday, expected at 5.76% y/y vs. 5.85% in mid-December.  On Friday, it reports December current account and FDI data.  The Brazilian central bank raised rates by 50 bps to 10.50% last week, as we expected.  However, the addition of the qualifier “at this moment” likely signals a change of pace at the next meeting.  As such, another 25 bp hike on February 26 seems likely, which will probably mark the end of the tightening cycle. This reinforces our view that the 2.40 top for USD/BRL should hold for now, but it also suggests the possibility of a flattening trend for the local swaps curve.  Support seen near 2.35.

Mexico reports mid-January CPI inflation on Thursday, expected at 4.6% y/y vs. 3.85% in mid-December.  Core inflation is also seen rising to 3.3% y/y from 2.75% in mid-December.  Retail sales data will also come out this week, with ANTAD data for December out on Tuesday (consensus 0.3% y/y vs. 3.4% in November) and INEGI data for November out on Friday (consensus 0.8% y/y vs. -1.1% in October).  The recent acceleration in inflation should justify the central bank’s decision to keep rates steady at 3.5% since the last 25 bp cut in October.  However, real sector data remain weak for the most part and so we can't rule out another cut in 2014 if the recovery doesn't materialize as the bank expects.  Inflation looks set to move above the 2-4% target range, but we note that above-target inflation didn't stop the bank from cutting rates in March 2013.  For USD/MXN, support seen near 13.20 and then 13.00, while resistance seen near 13.40-45.