Emerging Markets: Weekly Preview

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

Bank of Thailand meets Wednesday and is expected to keep rates steady at 2.5%. However, disinflation continues and should set the table for an eventual cut by the BOT. Core CPI rose only 0.6% y/y in September, right at the bottom of the 0.5-3.0% target range. Meanwhile, IP, consumption, investment, and exports are either weak or outright contracting. For THB/USD, support seen near 31.00, resistance seen near 31.50 and then 32.00.

Brazil central bank releases minutes of its October 8/9 meeting on Thursday. Before that on Tuesday, August retail sales will be reported with some weakness expected. On Friday, Brazil reports mid-October IPCA inflation and is expected to show further easing of price pressures. The language after the decision to hike 50 bp was unchanged from previous months, suggesting that the current pace of 50 bp hikes will continue at the November 26/27 meeting. Minutes should provide some clues. For USD/BRL, support seen near 2.15 as well as from an upward sloping daily trendline dating back to March that comes in near 2.14. Resistance seen near 2.20 and then 2.25. 

Separately, Brazilian pre-electoral politics is also heating up. Marina Silva, the main challenger to fight next year’s presidential elections against Dilma, has announced an alliance to with Eduardo Campos. Marina has 29% of voter intentions and Campos has 21%, according to a recent poll (compared with 42% for Dilma). Observers will not be looking for clues as to who will run for president, and which will run as vice-president in the new alliances, and what their combined platform would look like. At this point, the Silva-Campos duo looks like the only real contenders to challenge the current president. 

Poland central bank releases minutes of its October 2 meeting on Thursday. At that meeting, rates were kept at 2.5% for the third straight month. September IP will be reported Thursday too. Before the minutes, Poland reports September CPI on Tuesday and is expected to remain steady at 1.1% y/y. Real sector data have stabilized, but we think a robust recovery is unlikely. Consensus is for the tightening cycle to begin in Q2 2014 and continue through the rest of the year. This seems overdone. While rates have likely bottomed, we think they are unlikely to move higher by Q2 2014. The central bank just lost one of its hawks too, and will most likely be replaced by a dove, making rate hikes harder to push through. For EUR/PLN, support seen near 4.15, resistance seen near 4.20 and then 4.25.

Chile central bank meets Thursday and is expected to keep rates steady at 5.0%. CPI inflation eased to 2.0% y/y in September, right at the bottom of the 2-4% target range and is likely to fall below it in the coming months. Retail sales remain robust, while IP and exports are still soft. This mixed picture has kept policy on hold. However, the central bank has signaled rate cuts ahead, and falling inflation should allow the easing cycle to start in Q4 2013. Consensus call is for 25-50 bp of easing in Q4 followed by another 25 bp cut in Q1 2014. For USD/CLP, suppor seen near 495 and then 490, resistance seen near 500 and then 505.

In Mexico, all eyes are on the budget negotiations. Tax rate increases for high earners are being considered. The government will have to look into ways to cover the shortfall from removal or water down of certain taxes, such as private education tuition, mortgage interest, and home rentals. These taxes were indented to help finance a new energy plan. The lower house has until October 20 to approve the revenue portion of the budget.