Emerging Market Preview: The Week Ahead

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

Central bank of Turkey meets Tuesday and is expected keep rates steady at 10.0%. For now, improved EM sentiment has helped the lira stabilize. But inflation is likely to continue rising and this will push real rates lower and so more tightening may be needed in the coming months. For USD/TRY, support seen near 2.15 and then 2.10, while resistance seen near 2.25 and then 2.30.

Central bank of Hungary meets Tuesday and is expected to cut rates 10 bp to 2.75%. CPI inflation was zero in January, and points to higher deflation risk ahead even though the economy is recovering. We think easing will continue but we are likely getting close the trough for rates, perhaps around 2.25-2.50%. For EUR/HUF, support seen near 305 and then 300, while resistance seen near 310 and then 315.

Central bank of Chile meets Tuesday and is expected to cut rates 25 bp to 4.25%. The data have come in softer in recent months, and with inflation below the center of the 2-4% target range, there is scope to ease. One factor that could have prevented a rate cut is the softer peso, but this risk has lessened after the recent recovery in EM sentiment saw USD/CLP drop back below 550. For USD/CLP, support seen near 540 and then 530, while resistance seen near 550 and then 560.

South Africa reports January CPI Wednesday and is expected to rise 5.7% y/y vs. 5.4% in December. With weakness in the rand accelerating last month, the risks to this reading are to the upside. The SARB hiked rates by 50 bp at its January meeting to 5.5%, but with real interest rates still negative and likely to remain so, further hikes may be needed even though growth remains at risk. For USD/ZAR, support seen near 10.75 and then 10.50, while resistance seen near 11.00 and then 11.25.

Malaysia reports January CPI Wednesday and is expected to rise 3.3% y/y vs. 3.2% in December. The economy is picking up modestly even as inflation rises a bit, which should keep the central bank on hold for the time being. For USD/MYR, support seen near 3.30 and then 3.25, while resistance seen near 3.35.

HSBC flash China PMI for February is due out Thursday and is expected at 49.4 vs. 49.5 final for January. January PMI readings were softer, but IP and retail sales were not reported for the month and will instead be combined with February to minimize Lunar New Year distortions. The stronger than expected January trade data should be seen as an outlier, with other measures in China likely to point to softer growth in Q1. We see USD/CNY remaining broadly stable in the 6.04-6.08 range for now.

Taiwan reports January export orders and Q4 current account on Thursday. Exports have not yet recovered strongly, but orders suggest some relief ahead. January order seen up 1.8% y/y vs. 7.4% in December. External accounts remain in good shape, however, as imports slowed even more than exports in 2013. The current account surplus is seen at $15.4 bln vs. 14.9 ln in Q3, which would take the 2013 total to around $56 bln, or nearly 12% of GDP. For USD/TWD, support seen near 30.20 and then 30.00, while resistance seen near 30.40 and then 30.50.

Brazil reports mid-February IPCA inflation on Friday and is expected to remain steady at 5.63% y/y. Market is pricing in a 25 bp hike to 10.75% by COPOM on February 27, and expectations for the year-end Selic rate rose to 11.25% last week from 11% previously. The end-2015 rate is now seen at 12% vs. 11.88% previously. For USD/BRL, support seen near 2.35 and then 2.30, while resistance seen near 2.40 and then 2.45.

Mexico reports Q4 GDP on Friday and is expected at 1.2% y/y vs. 1.3% in Q3. The economy is limping into 2014 with little momentum, as data have come in soft across the board. Yet minutes from Banxico’s last meeting remains upbeat and tilted a bit hawkish. It noted that the balance of inflation risks had deteriorated, and that the labor market is showing less slack. Still, it noted that high inflation was seen as temporary. We do not think the central bank’s stance can be maintained if the data continue to come in weak, so there is a risk of a more dovish bias ahead. For USD/MXN, support seen near 13.20 and then 13.00, while resistance seen near 13.40 and then 13.60.