EM Preview for the Week Ahead

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

The most contentious event this week will be the Turkish central bank meeting - observers still differ on the magnitude of the increase in the overnight lending rate. Hungary should cut rates by 25 bp, while the Philippines and Colombian central banks are expected to keep rates unchanged. On the data front, China’s unofficial manufacturing PMI will remain well below 50, CPI in South Africa is expected to stay elevated, while in Mexico the mid-week inflation print and trade balance numbers are unlikely to be market moving events.

Hungary central bank meets Tuesday and is expected to cut rates 25 bp to 4.0%. June CPI edged up to 1.9% y/y in June but remains below the 2-4% target range. Minutes from the June 25 meeting show the decision to cut by 25 bp was unanimous for the third straight month. The officials felt that rate cuts may continue if the outlook for CPI inflation and the economy justify the moves. Since then, economic data have stabilized somewhat, but not by enough to stop the easing cycle yet. For EUR/HUF, support seen near 292 and then 290, resistance near 300, 305, and then 310.

Turkey central bank meets Tuesday and is expected to widen its rates corridor with an upward adjustment of the ceiling. Consensus is for a 75 bp hike in the ceiling to 7.25%, with all other rates kept steady, but expectations range from 50-100 bp. We believe a stronger message (at least 100 bp) needs to be sent, but are unsure whether Governor Bacsi can deliver it at this juncture. The lira has stabilized but it's way too early to declare victory, especially as Turkish fundamentals are still deteriorating. At least policymakers have injected more two-way risk for now. For USD/TRY, support seen near 1.90 and then 1.85, resistance seen near 1.95 and then 1.9740.

HSBC flash Manufacturing China PMI for July due out Wednesday, expected at 48.5 vs. 48.2 final June reading. The official reading fell to 50.1 in June while the HSBC reading has been below 50 for two straight months now. HSBC PMI tracks better with IP data, which came in weaker-than-expected at 8.9% y/y in June. It is clear to us that downside risks to China growth are building, especially after Finance Minister Lou said recently that 6.5% growth could be tolerable in the future. USD/CNY continues to trade sideways, and we see this continuing in Q3 and most likely Q4 too.

Mexico mid-July CPI due out Wednesday and the trade balance on Thursday. Headline inflation is seen easing to 3.7% y/y from 4.2% y/y in mid-June, while core inflation is seen easing to 2.7% y/y from 2.8% y/y in mid-June. Minutes will be released Friday for the policy meeting July 12, when the central bank left rates steady at 4% but issued a series of dovish comments that kept the overall tone of recent meetings. Despite the slowing economy, we do not think the central bank is in any hurry to cut rates. A rate cut at the next meeting on September 6 is possible, but will depend in large part on the data and on the peso. The trade balance is expected to remain in a modest deficit of around $500 mln. For USD/MXN, support seen near 12.40 and then 12.00, resistance seen near 12.60 and then 12.80.

South Africa June CPI due out Wednesday, expected at 5.7% y/y vs. 5.6% y/y in May. SARB kept rates steady at 5.0% last week, and the comments were slanted to the dovish side. We still think there is a chance of a rate cut this year, FX conditions permitting. Finance Minister Gordhan said Friday that the government will likely cut its 2013 growth forecast to 2.0-2.2% from 2.7% forecast in February. For USD/ZAR, support seen near 9.80 and then 9.50. Resistance seen near 10.00, 10.30, and then 10.37.

Philippines central bank meets Thursday and is expected to keep rates steady at 3.5%. June CPI picked up to 2.8% y/y vs. 2.6% y/y in May, but core CPI decelerated to 2.9% y/y vs. 3.0% y/y in May. Price pressures remain relatively low (and below the 3-5% target range), but with the economy remaining so robust, there is no need to ease monetary policy yet. If there is a H2 slowdown, the central bank will have cover to cut rates if price pressures do not pick up too much. For USD/PHP, support seen near 43.00 and then 42.50, resistance seen near 43.50 and then near 44.00.

Colombia central bank meets Friday and is expected to keep rates steady at 3.25%. It seems that policymakers are not happy with the recent move from 1950 down to 1875, as we heard a lot of jawboning in recent weeks. We think interest rates are basically on hold now, but further COP gains raises risk of resuming rate cuts. We see more FX intervention but no sign of Brazil-type measures in the works. For USD/COP, support seen near 1875 and 1850, resistance seen near 1900 and then 1950. The pair tested a daily trendline dating back to January coming in near 1870 but that held.