Emerging Markets: The Week Ahead

 (from my colleague Dr. Win Thin)

Bank Indonesia meets on Tuesday and is expected to keep rates steady at 7.5%.  Foreign investors have returned, lured by relatively high yields and improved fundamentals.  Foreign share of government bond holdings rose to 33.6% in March, the highest since May 2013.  Foreign flows into equities also turned positive in Q1.  For USD/IDR, support seen near 11300 and then 11000, while resistance seen near 11500.

Turkey reports February IP on Tuesday and is expected to rise 4.6% y/y vs. 7.3% in January.  It then reports February current account data on Friday, expected at -$3.0 bln vs. -$4.9 bln in January.  The February trade gap was better than expected, driven by collapsing imports, and so there is risk of a better current account reading as well.  We do not like the fact that Erdogan is leaning on the central bank to cut rates.  Next meeting is April 24.  For USD/TRY, support seen near 2.10 and then 2.05, while resistance seen near 2.15 and then 2.20.

Hungary reports February IP on Tuesday and is expected to rise 5.9% y/y vs. 6.1% in January.  It reports central bank minutes and February trade on Wednesday (EUR750 mln consensus), and then March CPI on Friday (0.2% y/y consensus).  The weekend elections saw ruling Fidesz retaining its power.  Early results suggest it won 133 of 199 seats, retaining its two-thirds majority.  However, final results will be published later this week and there could be some changes in the seat allocations.  For EUR/HUF, support seen near 305 and then 300, while resistance seen near 310.

Chile reports March CPI on Tuesday and is expected to rise 3.3% y/y vs. 3.2% in February.  This would keep it in the upper half of the 2-4% target range.  The bank has signaled a slower pace of easing, and so seems likely to keep rates steady at 4% on April 17.  For USD/CLP, support seen near 550 and then 540, while resistance seen near 560 and then 580.

Poland central bank meets on Wednesday and is expected to keep rates steady at 2.5%.  March CPI inflation is expected to remain steady at 0.7% y/y when it’s reported April 15, so there’s no hurry to hike.  Indeed, most central bank officials have been pushing out the timing of the first rate hike in recent weeks.  We think Q4 is the best bet now, but with risks tilted towards later rather than sooner.  On Friday, Poland reports February trade and current account data.  For EUR/PLN, support seen near 4.16 and then 4.14, while resistance seen near 4.18 and then 4.20.

Czech Republic reports March CPI on Wednesday and is expected to remain steady at 0.2% y/y.  Data have improved modestly, but central bank officials have issued forward guidance that policy will remain expansive until 2015. 

Brazil reports March IPCA inflation on Wednesday and is expected at 6.08% y/y vs. 5.68% in February.  It also releases the first preview of IGP-M wholesale inflation for March on Wednesday, with consensus seeing a 0.8% m/m gain.  If sustained, this would lead to an 8.0% y/y rate vs. 7.3% in March.  Minutes from last week’s COPOM meeting will be released Thursday.  Language in the policy statement suggests a desire to hold rates at 11%, but it all depends on how the inflation data behave ahead of the next meeting May 28.  We think risks are tilted towards higher inflation and thus higher SELIC rates ahead.  For USD/BRL, support seen near 2.2350 and then 2.20, while resistance seen near 2.30.

Mexico reports March CPI on Wednesday, and is expected to rise 3.79% y/y vs. 4.23% in February.  This would put it back in the 2-4% target range for the first times since December.  ANTAD retail sales for March will also come out Wednesday, expected at -1.2% y/y.  Mexico then reports February IP on Friday and is expected to rise 1.0% y/y.  Minutes from the March meeting released last Friday came in largely as expected and were very similar to recent comments.  For now, we see steady rates but the bank has signaled potential for a more dovish stance with its downgraded forecasts and economic outlook.  Let's see how data come in for Q2.  If still weak, then we think Banxico will have to adjust its message around mid-year.  For USD/MXN, support seen near 13.00 and then 12.80, while resistance seen near 13.20.

Bank of Korea meets on Thursday and is expected to keep rates steady at 2.5%.  Despite CPI inflation of 1.3% y/y in March, below the 2.5-3.5% target range, the BOK has left rates steady since the last 25 bp cut back in May 2013.  The economy is picking up modestly, but the China slowdown poses downside risks to the regional economies.  For now, we see steady rates but policymakers won’t be happy with continued won firmness and so we would look for increased FX intervention on an approach of 1000.  For USD/KRW, support seen near 1050 while resistance seen near 1060.  The key JPY/KRW cross has moved back towards 10. 

China’s data deluge will start on Thursday with the release of March trade.  Exports are expected to rise 4.9% y/y and imports are expected to rise 4% y/y.  EM trade data for March so far has been mixed, with Taiwan and Chile reporting today.  Taiwan exports rose 2.0% y/y while Chile exports rose 17.8% y/y.  Last week, Korea reported exports up 5.2% while Brazil exports fell -8.8% y/y.  Overall, a mixed bag and doesn't really tell us much about China trade.  On Friday, China follows up with CPI and PPI, expected at 2.4% y/y and -2.2% y/y, respectively.  New loan and money data could come out towards the end of the week, but no date has been set yet.  Retail sales and IP come out next week.  With policymaker focus back on growth instead of inflation, we believe USD/CNY will continue to trade in a new, higher range of 6.20-6.30 in Q2.

Peru central bank meets on Thursday and is expected to keep rates steady at 4.0%.  Despite signs of slowing in the economy, inflation remains above target and so the central bank is likely to remain on hold for the time being.  We believe PEN remains attractive given its relatively high yields (higher than MXN, CLP, and COP) along with relatively low volatility (lower than MXN, CLP, and COP).  For USD/PEN, support seen near 2.80 while resistance seen near 2.82.