Emerging Market Preview: Monetary Policy and Data

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

Turkey central bank meets Tuesday and is expected to keep rates steady. With the lira stabilizing, the central bank has loosened up liquidity conditions by lowering the average cost of funds for banks close to 6.0% after a brief spike above 7.0% in August. 

That loosening should continue, and so the current rates corridor of 3.5-7.75% is likely to remain in place for now. USD/TRY broke below 2.0 for the first time since late August. Next support levels are 1.95 and 1.90, while resistance is seen near 2.00 and then 2.05.

South African Reserve bank meets Thursday and is expected to keep rates steady. Ahead of that, South Africa reports Q2 nonfarm payrolls on Tuesday along with July retail sales and August CPI on Wednesday. Data is expected to show a continued fundamental mix of high inflation, sluggish growth, and high external financing needs. Clean break of 10.00 for USD/ZAR points to a test of the 9.50 area.

Polish central bank publishes minutes on Thursday. Rates have been kept at 2.5% since the last cut in July, as the data have stabilized and are even starting to turn up a bit. Inflation at 1.1% y/y in August remains below the2-4% target range, and so the central bank may have some leeway to resume cutting if the economy starts to soften again, but not over the near-term. EUR/PLN broke below support at 4.20 and is testing the 200-day moving average near 4.19. Break below would set up a test of 4.15 and then possibly 4.10.

The Reserve Bank of India holds a policy meeting on Friday. This will be the first meeting under new RBI Governor Rajan, who has already been able to stabilize the rupee right after taking the helm. Recent INR stability should keep the RBI on hold this week. Still, Rajan has an unenviable job. August wholesale price inflation came in on the strong side at 6.1% y/y, a six-month high. Part of this was due to higher import prices from currency pass-through. Also, food prices spiked by 18.2% y/y after the monsoon damaged many crops, leading to a 77.8% y/y increase in vegetable prices. For USD/INR, support seen near 62.00 and then 60.00, resistance seen near 64.00.

Brazil reports mid-September IPCA inflation on Friday. Data have come in on the firm side recently, and suggests a 50 bp hike to 9.5% is a done deal October 8/9. We see another 25 bp hike at the November 26/27 meeting, with risk of more tightening if inflation readings remain too high. USD/BRL running into some support near 2.25, but a break would target 2.20. Resistance is seen near 2.30.

Mexican central bank publishes minutes on Friday. At that last meeting, the bank unexpectedly cut rates 25 bp to 3.75% and issued a dovish statement. Minutes could yield some important clues as to the expected pace and magnitude of the easing cycle. We do not foresee an aggressive easing cycle, but more cuts do seem likely as the data remain weak. Break of 13.00 sets up a test of the 12.80 area and then potentially 12.60.