Emerging Market Preview of the Week Ahead

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

Israeli central bank meets today and is expected to keep rates steady at 1.0%. Price pressures remain low, with CPI rising only 1.8% y/y in December and is right near the center of its 1-3% target range. We continue to believe that shekel strength would be the tipping point for another rate cut, but recent weakness along with the rest of EM suggests that rate cut risks are receding. The shekel has outperformed within EM, but recent weakness underscores the fact that no one is safe in EM. For USD/ILS, support seen near 3.4750 while resistance seen near 3.50 and then 3.5250.

Reserve Bank of India meets Tuesday and is expected to keep policy rates steady. There is a very small chance of a surprise rate hike should Rajan want to drive the point of inflation targeting, but this is highly unlikely. December CPI and WPI readings slowed, which was consistent with Governor Rajan’s view that the spike was temporary. Still, the fundamentals remain fairly weak. The rupee had been outperforming despite weak fundamentals but the overall EM selling finally took a toll. USD/INR traded above 63.00 today, its highest level since November 14. Resistance seen near 64.00, while support seen near 62.50 and then 62.00. 

Malaysian central bank meets Wednesday and is expected to keep rates steady at 3.0%. Price pressures are edging up, with CPI inflation of 3.2% y/y in December marking a high for this cycle. Still, we think growth concerns remain in play and so Bank Negara is likely to stand pat for the time being. USD/MYR has broken the August high near 3.3375, which targets the 3.40 area. Support seen near 3.30.

South Africa Reserve Bank meets Wednesday and is expected to keep rates steady at 5.0%. There is growing speculation that the SARB will choose to hike rates to help counteract the weakening rand. We think we are not yet at that point. The SARB remains more focused on inflation trends than FX when conducting monetary policy and the pass-through of the recent depreciation does not yet appear to be alarming. Sluggish growth remains an issue as South Africa reports December M3, private sector credit, and PPI on Thursday. Both M3 and credit slowed to cycle lows in November, and are likely to continue slowing. PPI is expected to rise 6.1% y/y vs. 5.8% in November, and there is further upside risks to inflation readings ahead due to the weak rand. December trade will be reported Friday. USD/ZAR continues to make new highs for this move, trading well above 11.00 to levels not seen since 2008. Indeed, the all-time October 2008 high near 11.87 lies ahead. 

Turkey central bank has called an emergency meeting on Tuesday in response to the slumping lira. Expectations for a bold move and potential rate hike have helped the lira stabilize. At this point, we doubt that a rate hike will have much the positive impact. There is some speculation that capital controls will be considered but this would be a very dangerous move given the country’s reliance on hot money flows to finance its current account deficit. Turkey also reports December trade on Friday, expected at -$7.1 bln vs. -$7.15 bln in November. November saw some stabilization of the trade and current account deficits, and consensus reading for December would see further modest improvement. Still, it’s too early to say the worst is over, especially as inflation is likely to accelerate due to the plunging lira. January CPI will come out the following week on February 3, and is likely to be higher than the 7.4% y/y rate in December. USD/TRY continues to make new all-time highs and traded close to 2.40 today but the central bank news saw the pair drop sharply back to support near 2.30. Looking ahead, we see an upward sloping channel dating back to 2007 whose top comes in near 2.60. 

Brazil reports December fiscal data on Friday. December tax revenues were fairly strong, rising 15% y/y. Good November budget results were skewed by one-off factors, and so doubts remain as to whether the government can get fiscal policy back on track in a sustainable manner, especially given that it’s an election year. USD/BRL gapped above 2.40 Friday to trade as high as 2.4325, but later dropped and filled that gap to test the 2.40 support level. Break below would see next support level near 2.35, while resistance seen near 2.45.

Banco de Mexico meets Friday and is expected to keep rates steady at 3.5%. Inflation accelerated in mid-January, with headline CPI now above the 2-4% target. This should keep the central bank from cutting rates now, but we think that further unexpected weakness in the real sector could led to an easing bias in 2014. Despite fairly strong fundamentals, the peso has gotten caught up in the generalized EM sell off. USD/MXN ran into resistance near 13.60, and had not traded above that level since July 2012. Clean break would target the 14.00, while support seen near 13.40 and then 13.20.

Colombian central bank meets Friday and is expected to keep rates steady at 3.25%. CPI inflation remains near the trough for this cycle, and the 1.9% y/y rate in December is below the 2-4% target range. The weaker peso should boost the economy, though President Santos said he would welcome “a bit more” weakness. This has taken some pressure off the central bank to ease, and we see steady rates ahead. However, the economy remains sluggish and so we cannot rule out a cut later this year. USD/COP tested but could not make a clean break above resistance around 2000. Still, it was the first time the pair traded above that level since December 2010. Eventual break seems likely, and would target the 2050 and 2100 levels first. Support seen near 1975 and 1950.

After markets close on Friday (Saturday morning in Asia), Korea reports January trade and China reports official PMI for January. Korea will provide the first snapshot of global trade in 2014, with exports expected to rise 0.5% y/y and imports expected to contract -1.7%. December trade data has been mixed as Brazil and Korea export growth accelerated while China, Taiwan, and Chile exports decelerated.  Regardless, Korean exporters have to be happy with the 1.5% jump Friday in JPY/KRW. Both yen strength and won weakness were working and the pair is back above 10.5 for the first time since November. We think Korea has pretty strong fundamentals and KRW should do relatively better within EM, but recent price action underscores that no one in EM is safe. For USD/KRW, resistance seen near 1090 and then 1100, while support seen near 1080 and then 1070.

Meanwhile, consensus for January China official PMI is 50.5 vs. 51.0 in December. However, markets are likely bracing for an even weaker reading after the HSBC flash PMI came in at 49.6 vs. 50.3 consensus and 50.5 final December. That was the first sub-50 reading since July, but the official PMI has not been below 50 since September 2012. We see USD/CNY trading largely within the recent 6.04-6.08 range. Note that the Lunar New Year holiday starts with markets first closing on Friday January 31 and reopening on Friday February 7.