Emerging Market Preview for the Week Ahead

(from my colleague Ilan Solot)

Chile central bank meets Tuesday and the market is split between no change or a 25 bp cut to 4.75%. If they cut, this would be the first cut since January 2012. Exports have started to recover, but IP is still contracting and growth remains sluggish at around 4% y/y in both Q1 and Q2. Retail sales have also started to soften, while inflation is starting to tick higher. At 2.2% y/y in July, it is back in the 2-4% target range for the first time since November 2012. The policy rate has been stuck at 5% since January 2012. USD/CLP has traded in the 490-520 range since Q2 began. Some intermediate support is seen near 500.

Hungary July CPI due out Tuesday, expected at 2.0% y/y vs. 1.9% y/y in June. Hungary Q2 GDP due out Wednesday, expected at 0.6% y/y vs. -0.9% y/y in Q1. If so, this would be the first positive y/y reading since Q4 2011. Yet the recovery is likely to remain sluggish, and so the central bank has signaled further easing ahead but at a slower pace. Consensus is for another cut at the August 27 meeting. EUR/HUF is likely to continue trading largely in the 290-300 range for the time being. Some intermediate support is seen near 295.

 Poland Q2 GDP due out Tuesday and expected at 0.7% y/y vs. 0.5% y/y in Q1. July CPI due out Wednesday, expected at 0.5% y/y vs. 0.2% y/y in June. Tensions are building regarding the weak economic backdrop, reflected in reports that Finance Minister Rostowski may be replaced. Prime Minister Tusk’s government has seen its support erode due to the weak economy. EUR/PLN broke below 4.20, with 4.10 seen as the next level of support. 200-day MA comes in near 4.1750, and some intermediate support seen near 4.15 too.

Czech Q2 GDP due out on Wednesday and expected at -1.4% y/y vs. -2.2% y/y in Q1. The recession continues, and the debate over more stimulus via a weaker koruna is likely to continue. Last week, July inflation data showed disinflation continuing and the economy still weak. Core rate of 0.2% y/y in June is nearing deflationary territory. Next policy meeting isn't until September 26, so we still have a month and a half of data to digest ahead. If data remain weak, a move to weaken the currency at the September meeting is possible. For EUR/CZK, support seen near 25.80 and then 25.60, resistance seen near 26.00 and then 26.20.

Bank Indonesia meets Thursday and is expected to keep rates steady at 6.50%. Inflation spiked to 8.6% y/y in July, well above the 3.5-5.5% target, and so further tightening is still a risk. Yet growth is slowing, so the authorities have a delicate balancing act ahead. USD/IDR continues to drift higher, but is having trouble breaking above the 10300 area. Given the combination of slow growth, high inflation, and rising current account gap, the rupiah is likely to continue underperforming within EM.