Emerging Markets: Preview of the Week Ahead

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

EM currencies are coming off a bad week. BRL, IDR, and CLP have all lost 2% or more against USD over the past week. Other notable underperformers are ZAR, TRY, and MXN, all down 1.0-1.5% against USD. Asia continues to outperform, with PHP, KRW, and MYR up about 0.5% against USD over the past week.

We believe EM FX is likely to trade on its back foot going into the December 17/18 FOMC meeting and into year-end. While we do not expect tapering then, markets appear to be positioned quite defensively going into this meeting. 

Calendar considerations may also be playing a role, with little incentive to load up on EM ahead of year-end. We believe the weaker EM credits will continue to underperform near-term, and this group includes usual suspects BRL, ZAR, TRY, and IDR. 

Brazil has a very heavy week of releases. It reports November trade data on Monday. On Tuesday, it reports Q3 GDP and is expected at 2.4% y/y vs. 3.3% in Q2. Wednesday has October IP, expected at 0.3% y/y vs. 2.0% in September. COPOM minutes will come out Thursday, and will be scoured for clues to its next move. November IPCA inflation comes out Friday and is expected at 5.81% y/y vs. 5.84% in October. For USD/BRL, resistance seen near 2.35 and then 2.40 while support seen near 2.30 and then 2.25.

China reports non-manufacturing PMI on Tuesday, and stood at 56.3 in October. Over the weekend, China reported official manufacturing PMI at 51.4 vs. 51.1 expected and 51.4 in October. HSBC PMI also came out over the weekend, at 50.8 vs. 50.5 expected and 50.9 final October. The data deluge starts next week but PMI readings should set the tone for the month, with decent economic data likely to be seen. We see USD/CNY trading in the recent 6.08-6.12 range for now.

South Africa reports Q3 current account data on Tuesday and is expected to narrow to -6.0% of GDP from -6.5% in Q2. However, the trade deficit widened sharply in Q3 and so we see negative risks for the current account data. On Monday, November PMI was reported at 52.4, which points to a slight pickup in manufacturing ahead. For USD/ZAR, support seen near 10.00 while resistance seen near 10.25 and then 10.50.

Turkey reports November CPI on Tuesday and is expected to rise 7.8% y/y vs. 7.7% in October. Core is seen rising to 7.6% from 7.5%. The central bank next meets December 17, and is not expected to change policy after its hawkish guidance last month. However, the weighted average cost of funding for banks has moved substantially higher recently than the bank’s new “target” of 6.5%. Recall that 6.5% is what the central bank signaled views as consistent with its targeted interbank rate of 7.75%. Further pressure on the lira may force the bank to tighten again by raising the rates corridor ceiling at the December meeting. For USD/TRY, support seen near 2.00 while resistance seen near 2.05 and then 2.0850.

Poland central bank meets Wednesday and is expected to keep rates steady at 2.5%. Real sector data have been improving, which has led to some talk about tightening by mid-2014. Hungary is still cutting rates and Czech central bank has said koruna sales likely to continue until 2015. In that same vein, we do not think Poland will be hiking rates until late 2014 or early 2015. Inflation expectations as measured by the NBP fell to 0.7% in November from 0.9% in October. For EUR/PLN, resistance seen near 4.2070 (200-day MA) and then 4.25, while support seen near 4.17 and then 4.15.

Hungary reports October retail sales on Wednesday, expected to rise 1.0% y/y vs. 0.3% in September. The central bank will also release minutes from it last meeting, which are expected to highlight the risks of further easing ahead. October IP comes out Friday, expected to rise 5.0% y/y vs. 3.1% in September. Manufacturing PMI rose to 52.6 from 51.1 in October, and so there may be some upside surprises in IP in Q4. For EUR/HUF, resistance seen near 303.50 and then 308.65, while support seen near 300 and then 295.

Mexico central bank meets Friday and is expected to keep rates steady at 3.5%. On Monday, November PMI readings will be reported. Both manufacturing and non-manufacturing were below the 50 boom/bust level in October. Central banker Guzman said last week that more easing was unlikely because the economy is already strengthening. Reform prospects are up in the air, however, after the PRD withdrew from the Pact for Mexico on Friday. Polls show support for President Pena Nieto fading, which may make it more difficult for him to push through structural reforms. For USD/MXN, support seen near 13.00 while resistance seen near 13.20 and then 13.40-45.