Emerging Markets Preview: Week Ahead

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

EM currencies are coming out of a rough week, and are starting off this week on a softer note as well. The worst performers over the past week are CZK (-4% vs. EUR), BRL (-3% vs. USD), INR (-2.5%), ZAR (-2.25%), and IDR (-2%). Not surprisingly, CNY (+0.1% vs. USD), TWD (-0.4%), and SGD (-0.5%) have held up the best. EM equities were also hard hit, with Brazil (-4% over the past week), Turkey (-3.5%), and Mexico (-3%) faring the worst. Though we think tapering concerns for December are overstated, the Fed will eventually take that step. Our base case is for a start in March 2014, but of course that is data dependent. 

This may be enough to keep EM trading on its back foot for now. Many are approaching their lows from August and September. Some countries are better positioned now than they were over the summer in terms of supportive FX measures, such as Brazil and India. However, those with weak fundamentals are likely to continue bearing the brunt of the selling pressures. TRY (-1% vs. USD this past week) should be in this grouping. On the other hand, Asia (with the notable exceptions of IDR and INR) should continue to outperform in this environment. 

Indonesia central bank meets Tuesday and is expected to keep rates steady at 7.25%. CPI eased to 8.3% y/y in October from 8.4%, and past rate hikes and a stable rupiah appear to be working on limiting price pressures. Further hikes probably aren’t seen as desirable given the slowdown, as 5.6% growth in Q3 was the slowest since Q4 2009. For USD/IDR, support seen near 11000 and then 10750, resistance seen near 11750 and then 12000.

Hungary reports October CPI on Tuesday and is expected to remain steady at 1.4% y/y. On Wednesday, the central bank releases minutes from its October policy meeting when it cut 20 bp to 3.4%. On Thursday, Hungary reports Q3 GDP and is expected at 0.7% y/y vs. 0.5% in Q2. Next central bank policy meetings are November 26 and December 17. With growth slow and inflation low, we see 20 bp cuts at both of those meetings, which would take the policy rate down to 3.0%. For EUR/HUF, support seen near 295, resistance seen near 297.50 and then 300.

India reports October CPI on Tuesday and is expected to rise 9.9% y/y vs. 9.8% in September. It will also report September IP at the same time, expected to rise 3.5% y/y vs. 0.6% in August. On Friday, it reports October WPI and is expected to rise 6.9% y/y vs. 6.5% in September. Next RBI policy meeting is December 18. Governor Rajan has delivered two straight rate hikes since taking the helm, and another one is likely next month if price pressures remain strong and the rupee continues to weaken. For USD/INR, support seen near 63.00 and then 62.00, resistance seen near 64.00 and then 66.00.

Turkey reports September current account on Wednesday and is expected at -$2.7 bln vs. -$2.0 bln in August. The trade deficit was a bit larger than expected that month, so we see upside risks to the current account too. Next central bank policy meeting is November 19. Inflation remains too high, and the weaker lira will fed into more price pressures ahead. Poor fundamentals suggest lira underperformance will continue. For USD/TRY, support seen near 2.02 and then 2.00, resistance seen near 2.05 and then 2.0850.

Brazil reports September retail sales on Wednesday, expected to rise 4.6% y/y vs. 6.25 in August. Monthly GDP proxy will come out on Thursday and is expected to rise 3.8% y/y vs. 1.3% in August. If so, Q3 GDP growth would come in around 2.8% vs. 3.3% in Q2. Next COPOM meeting is November 26/27, and appears to be on track for another 50 bp hike to 10.0%. Further hikes are possible in 2014. For USD/BRL, support seen near 2.30, resistance seen near 2.35 and then 2.40.

Korea central bank meets Thursday and is expected to keep rates steady at 2.5%. CPI rose only 0.7% y/y in October, but the BOK remains on hold as the real sector data show some modest improvement. Inflation target is 2.5-3.5%, so low inflation will give the BOK leeway to cut if needed, especially if the won remains firm. For USD/KRW, support seen near 1060, resistance seen near 1080 and then 1100.

Czech Republic reports Q3 GDP Thursday and is expected at -0.5% y/y vs. -1.3% in Q2. October CPI was reported earlier today at 0.9% y/y vs. 1.0% in September, a cycle low and still falling. Q3 GDP comes out on Thursday and is expected at -0.5% y/y vs. -1.3% in Q2. With disinflation moving towards outright deflation, the central bank had little choice but to try and add more stimulus via a weaker koruna. We see EUR/CZK trading near the CNB’s desired level of 27.00 over the near-term. 

Poland reports Q3 GDP Thursday and is expected at 1.6% y/y vs. 0.8% in Q2. Later that day, October CPI will be reported and is expected to remain steady at 1.0% y/y. Next central bank policy meeting is December 4. Real sector data is picking up, and should keep the central bank on hold for now. For EUR/PLN, support seen near 4.15, resistance seen near 4.25 and then 4.30.