Emerging Markets: Preview of Week Ahead

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

China money markets are likely to remain in focus this week, as year-end funding pressures persist. The 7-day repo rate started week near 8.5%, the highest since June (the June high was 11.2%). CNY300 bln was injected over the course of last week, even as the PBOC noted that excess reserves stand near “a relatively high level historically” of CNY1.5 trln.” The PBOC’s targeted liquidity injections would seem to favor some financial institutions at the expense of others. 

Seasonal factors are playing a large (probably the largest) role here. However, the PBOC may also be opportunistically trying to squeeze the shadow banking sector to some degree again. Another story developing in parallel has been the reported efforts by the Chinese government to suppress media coverage of the liquidity squeeze. In the end, this last development may leave more lasting damage than the squeeze itself.

Mexico reports mid-December CPI Monday. Headline inflation is seen rising to 3.81% y/y from 3.51% in mid-November, while core is seen rising to 2.70% y/y from 2.42% in mid-November. Banxico minutes last Friday held no surprises. The decision to hold rates steady this month was unanimous, and the bank reaffirmed its outlook for growth to improve "slowly" in 2014. It also sees inflation remaining near 3.5% in 2014 before easing back near the 3% target in 2015. This all suggests that Banxico is in no hurry to tighten next year. We see rates on hold for the foreseeable future. For USD/MXN, support seen near 12.80, resistance seen near 13.10, and then 13.20.

Israel central bank holds its policy meeting Monday, and is expected to keep rates steady at 1.0%. Inflation continues to edge higher, and should keep the bank on hold for now. Offsetting this is continued currency strength. Central bank Cuikerman said last week that he doesn’t rule out a floor for the shekel. Swiss and Czech policymakers are doing this already, defending some sort of floor for their currencies. Cuikerman is an external member of the MPC, so we are not sure his idea has much support by the rest of the MPC. However, it does highlight the problem that some of the better EM credits are seeing, and that is a currency that is viewed as too strong. Further shekel strength would likely push the central bank into a more dovish bias but for now, we see rates on hold. For USD/ILS, support seen near 3.50 and then 3.48, while resistance seen near 3.5250 and then 3.55.

Singapore reports November IP on Thursday, and is expected to slow to 5.1% y/y from 8.0% in October. Earlier it reported November CPI, which was expected at 2.5% y/y vs. 2.0% in October. The real sector remains weak, however. NODX was weaker than expected, contracting -8.8% y/y vs. 4.3% y/y consensus gain and 2.8% in October. October real retail sales were much weaker than expected at -7.5% y/y, and contracting for the fifth straight month and for twelve of the past thirteen. With inflation creeping higher, the MAS will likely feel justified in keeping policy steady this October. However, it may come at a price of slower growth in 2014. For USD/SGD, support seen near 1.2600, while resistance seen near 1.2700 and then 1.2800.

Taiwan central bank holds its quarterly policy meeting Thursday, and is expected to keep rates steady at 1.875%. On Tuesday, it reports November IP and commercial sales, with both series expected to show very modest improvement from October. Export orders have been basically stagnant this year, and have only recently starting to perk up slightly. This has weighed on exports (flat y/y in November after two straight months of y/y contraction). The weak yen is an issue for Taiwan, just as it is for Korea in terms of export competitiveness. We note that the TWD/JPY cross is trading near 3.50, the highest level since 2008. Overall, the economy remains soft and GDP growth of only around 2% is expected this year. Rather than cutting rates, we believe policymakers will instead focus on fiscal stimulus and trying to maintain a more competitive exchange rate. For USD/TWD, support now seen near 29.80 and 29.60, while resistance seen near 30.00 and then 30.20.

On Friday, Thailand reports November trade and current account data. Sometime this week, it also reports November manufacturing production, which expected at -11% y/y vs. -4% y/y in October. This will be the first month where the potential impact of recent street protests will be seen. Confidence readings have been steadily dropping this year and are at the lows in November, and so we would expect real sector data to continue reflecting this. Even before the protests began, the economy was already on the ropes. Private investment and manufacturing production have contracted y/y for seven straight months, while private consumption has contracted in two of the past four months. Exports are still shrinking, but collapsing imports has limited deterioration in the external accounts a bit. For USD/THB, support seen near 32.50 and then 32.00, while resistance seen near 33.00 and then 33.50.

Brazil reports November budget data on Friday. Tax revenues picked up in November, rising 34% y/y vs. 12% in October. This may help limit the fiscal deterioration in November, but the trend should be one of deterioration ahead. BRL was hit last week by changes to the FX intervention plan and by higher than expected mid-December IPCA inflation, which accelerated to 5.85% y/y from 5.79% in mid-November. The 3-month annualized change accelerated for the third straight month, and so we think COPOM will be under pressure to deliver another 50 bp hike in January instead of 25 bp, as some expect. For USD/BRL, support seen near 2.30 and resistance seen near 2.40. Given recent developments (including an inexplicable change in BCB intervention policy just as the Fed tapers), we think an upside break of this range is likely and would target the August high near 2.45.