Emerging Markets: Preview of the Week Ahead

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

Today, Brazil will hold an auction for the Libra oil field, which is a test of the new model for oil exploration. The results should be announced at 2pm, Brasilia time. Not surprisingly, the new system is being highly criticized. Most major oil companies (BP, Exxon, Chevron) decided not to participate, leaving the field open to the likes of China’s CNOOC. Moreover, Petrobras has a 30% compulsory stake in any auctioned pre-salt field, and there is a high required local content for the service (around 50%). Meanwhile, the central bank is considering reducing swap auctions later this week, depending on the expected inflows from this oil auction. 

We still think that USD/BRL 2.15 will mark the low point for the pair for now – or at least will trigger a strong reaction from officials. Current account data for September will be reported Friday. External and fiscal accounts are becoming more of a concern, especially as FDI no longer fully covers the current account gap. For USD/BRL, support seen near 2.15 and then 2.10, while resistance seen near 2.20 and then 2.25.

South Africa reports September CPI Wednesday, and is expected at 5.9% y/y vs. 6.4% in August. This would mark a return to the 3-6% target range, but inflation still remains too high for the SARB to consider easing at its next meeting November 21. Labor unrest continues to hurt the economy. For USD/ZAR, support seen near 9.75 and then 9.50, resistance seen near 10.00 and then 10.20.

Turkey central bank holds policy meeting Wednesday and is expected to keep policy rates steady. Real sector data remain weak, so we expect the central bank to continue lowering the average cost of funds now that the lira is on firmer footing. However, worsening external accounts and still-high inflation argues for some lira underperformance ahead. For USD/TRY, support seen near 1.95 and then 1.90, resistance seen near 2.00 and then 2.05.

HSBC flash China PMI reading for October is due out Thursday, and is expected at 50.4 vs. 51.2 final in September. Recent data suggest very subdued growth ahead for China. Consensus readings for GDP growth over the next few quarters center around 7.5%. Recent break below 6.10 for USD/CNY was surprising, and it remains to be seen if this break can be sustained.

Philippines central bank holds policy meeting Thursday and is expected to keep rates steady at 3.5%. The economy remains firm enough for the bank to keep rates on hold for now. For USD/PHP, support seen near 43.00 and then 42.50, while resistance is seen near 43.50 and then 44.00.

Korea reports Q3 GDP Friday, and is expected to rise 3.1% y/y vs. 2.3% y/y in Q2. The BOK seems content to keep rates steady for now, despite headwinds to growth that include a firmer won. We expect BOK intervention to continue in USD/KRW, but we suspect the major worry is the JPY/KRW cross, which remains below 11. For USD/KRW, support seen near 1060 and then 1055, while resistance is seen near 1080 and then 1100.

Mexico central bank holds policy meeting Friday and is expected to cut rates by 25 bp to 3.5%. Earlier in the day, it reports September trade. Before that, Mexico reports mid-October CPI and August IGAE monthly GDP proxy on Thursday. Headline inflation is expected at 3.1% y/y vs. 3.5% in mid-September, while core inflation is expected at 2.4% y/y vs. 2.5% in mid-September. IGAE expected at 1.1% y/y vs. 1.7% in July. The weak data and low inflation certainly argue for further easing, but back to back cuts may be too aggressive. For USD/MXN, support seen near 12.80 and then 12.60, resistance seen near 13.00 and then 13.20.

Colombia central bank holds policy meeting Friday and is expected to keep rates steady at 3.25%. Before that, Colombia reports August trade on Tuesday. Last week, August IP (-3.9% y/y) and retail sales (+6.9% y/y) data were mixed but suggest potential softness in the economy. As such, rate cuts could resume if this trend continues. For USD/COP, support seen near 1880 and then 1860, while resistance seen near 1900 and then 1920.