Emerging Markets: Preview of the Week Ahead Events

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

The Israeli central bank met today and as expected, kept rates steady at 1.25%. Given the turmoil in the global markets right now, we think it makes sense to stand pat, but we believe the bank maintains a dovish bias. We also think policy will remain dovish under Governor-elect Frenkel. The shekel has outperformed during the recent EM FX rout, as USD/ILS is currently trading near 3.65. This is not very far away from the 3.60 area that triggered several rounds of intervention to weaken the shekel. Strong support seen at 3.60, while resistance seen near 3.65 and then 3.70.

India reports Q1 current account Tuesday, which is expected at -$21 bln. If so, the 4-quarter total would hardly budge, remaining near -$93 bln or still almost -5% of GDP. The twin deficits will likely prove to be India’s weak spot in the coming months. USD/INR made news all-time highs near 60.00 last week, and further gains are likely as it continues to trade in an upward sloping channel. Top currently comes in near 60.80. Support for USD/INR seen near 59.00 and then 58.00.

Hungary central bank meets Tuesday. Before the EM meltdown gained momentum, expectations were for a 25 bp cut to 4.25%. However, with the forint under pressure and turmoil spilling over to bond and equity markets, we think that the bank should stand pat now. However, we see a material chance of a policy mistake in Hungary given the history of blunders and disconnect between the Fidesz party and financial markets. EUR/HUF continues to test the 300 area, break of which would target 305 and then 310. Support seen near 295 and then 290.

Brazil central bank releases its quarterly inflation report Tuesday, and will be studied for clues on future policy. With the plunge in the real likely to feed into price pressures, market expectations have shifted to a more hawkish move at the July 9/10 meeting. Indeed, 75 bp has been fully priced in and markets are starting to price in a small chance of a 100 bp hike. For USD/BRL, resistance seen near last week’s highs near 2.2750, but think many have their sights set on the March 2009 high near 2.45. Support is seen near 2.25 and then 2.20.

Taiwan meets Thursday and rates are expected to be kept steady at 1.875%. Ahead of that, May IP and sales data are expected to show continued weakness in the economy. While low inflation gives the bank cover to cut rates, we think the focus will be on maintaining a competitive (weak) currency as well as further fiscal stimulus. USD/TWD finally broke above the July 2012 high near 30.20 but saw no follow-through. Near-term targets are 30.50 and then 30.7150, while support seen near 30.00 and then 29.80.

Czech central bank meets Thursday, and policy is expected to be kept steady. So far, the bank has not had to move forward with its plans to weaken the currency because the market is doing the heavy lifting for the central bank by selling CZK. The data remain weak, so a weaker koruna is warranted. For EUR/CZK, May high near 26.20 should be retested, followed by 26.50. Support is seen 25.80 and then 25.60.

Colombia central bank meets Friday, and rates are expected to be kept steady at 3.25%. The economy is showing some signs of stabilizing, with IP, retail sales, and Q1 GDP all coming in a bit firmer than expected. For now, rates are likely to remain on hold. Comments suggest policymakers are happy with the current bout of peso weakness, though we would caution them not to invite more weakness as bond and equity markets will likely suffer. For USD/COP, resistance is seen near 1950 but further gains appear likely. Break above would target 2000 and then 2050, while support seen near 1900 and then 1850.