Emerging Market Preview: The Week Ahead

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

Brazil reports July IPCA inflation on Wednesday, which is expected to fall to 6.24% y/y from 6.7% y/y in June. The markets are pricing in another 50 bp hike to when COPOM next meets August 27/28 and another 50 bp for the subsequent meeting. USD/BRL traded as high as 2.3130 Friday before the central bank intervened to help support the real. Improved EM sentiment Friday also helped, but we see this as temporary. Near-term, the 2.20-2.30 range should remain in place but we highlight the risk of an upside break as the real starts this week softer.

Hungary central bank minutes due out on Wednesday. At the July 23 meeting, the bank cut rates by 25 bp to 4.0%, as expected. However, Governor Matolcsy then surprised the markets with talk of potentially more easing ahead to between 3.0-3.5%, albeit in smaller increments. Next policy meeting is August 27, we think another cut of 12.5-25 bp is likely then. EUR/HUF recorded an outside down day Friday, which points to further near-term forint gains. However, the pair should see strong support near 295.

Banco de Mexico releases its quarterly inflation report for Q2 on Wednesday. July CPI will then be reported Thursday, with headline seen easing to 3.6% y/y from 4.1% y/y in June. Core is seen easing to 2.6% y/y vs. 2.8% y/y. With inflation falling and the real sector softening, markets continue to look for easing in the coming months. Next policy meetings ahead in 2013 are September 6, October 25, and December 6. USD/MXN likely to see support near 12.60 and then 12.40.

Bank of Korea meets Thursday and is expected to keep rates steady at 2.5%. After mixed economic data last week, we continue to see a backdrop of low inflation and sluggish growth continuing through year-end. We feel further BOK easing is likely, but the pace remains cautious. A weaker won would also be welcomed. Support for USD/KRW seen near 1100 and 1080.

Peru central bank meets Thursday and is expected to keep rates steady at 4.25%. Last week, July CPI was reported at 3.24% y/y vs. 2.77% y/y in June, the first time above the 1-3% target range since October 2012. We do not see any tightening ahead in response, but easing has clearly been pushed out further, especially with the economy and price pressures showing some signs of picking up in Q2. For USD/PEN, resistance seen near 2.80, support seen near 2.75 and then 2.70.

China data deluge will begin with July trade towards the end of the week. Exports and imports are expected to rise 1.5% y/y and 1% y/y, respectively, after both contracted y/y in June. July CPI is out Friday, and is expected to accelerate slightly to 2.8% y/y from 2.7% y/y in June. Also out Friday is July IP (seen at 9.0% y/y vs. 8.9% y/y in June) and retail sales (seen at 13.5% y/y vs. 13.3% y/y in June). For now, we see USD/CNY continuing to trade sideways.