Emerging Markets: Preview for the Week Ahead

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

Israel central bank meets today and is expected to keep policy unchanged. A dovish bias is likely to remain in place, and the resumption of easing becomes more likely if the shekel remains firm. Indeed, we expect further FX intervention if the 3.55 is tested again.

The Reserve Bank of India meets Tuesday and is expected to keep policy unchanged. Growth remains sluggish, but too-high inflation is likely to prevent any response this month. Measures taken to stabilize the rupee are working for now, but this has also been due in large part to an improvement in general market sentiment. We see INR underperforming ahead in both directions, as poor fundamentals will continue to weigh on the currency. For now, we see USD/INR trading largely in the 59.0-61.0 range.

The Central Bank of Turkey will release its inflation report on Tuesday. The inflation forecasts are likely to be tweaked higher, at least for this year. After the central bank raised the overnight lending rate 75 bp to 7.25% on July 23, it has snugged the average cost of funding higher in an effort to stabilize the lira. With CPI at a multi-month high of 8.3% y/y in June, policymakers may have to do more to improve market sentiment. For now, we see USD/TRY trading largely in the 1.90-1.95 range, and we expect the lira to underperform in both directions due to still-poor fundamentals.

China reports official July manufacturing PMI Thursday, and is expected to fall to 49.8 from 50.1 in June. Non-manufacturing PMI reading will be reported Saturday. The new government is pressing ahead with numerous financial and economic reforms. While it has been reluctant to provide fresh monetary or fiscal stimulus, it did announce some modest fiscal measures last week, including increased railroad spending and support for exporters. Separately, new pressures, though not as extreme as last month, have emerged in China's money markets in recent days and it may be related to month-end settlement issues (especially of wealth management products). Overnight rates (SHIBOR) rose 15 bp, and the 1-week repo rose 70 bp, while equities fell to three-week lows, helped by reports of a new audit of government debt and slowing profits. We continue to see USD/CNY trading sideways in Q3.

Czech central bank meets Thursday and is expected to keep policy unchanged. We expect the debate over whether or not to take steps to weaken the koruna to continue, but this meeting is likely too soon to see that yet. EUR/CZK has largely remained in the 25.60-26.20 range since Q2 began, but we think the economic backdrop remains poor and justifies further stimulus measures.

Both Korea and Brazil will report July trade data Thursday, providing the first glimpse of global trade activity for H2. Brazil also reports June fiscal data Tuesday, June IP and July PMI Thursday, and FIPE inflation Friday. Overall, we expect the backdrop of sluggish growth and high (but slowly easing) price pressures to continue. Market is looking for another 50 bp hike to 9.0% at the next COPOM meeting July 28/29. Until the fundamental backdrop improves, USD/BRL is likely to remain stuck in the 2.20-2.30 range.