Emerging Market Preview: The Week Ahead

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

 

The external backdrop for EM remains constructive, and the rally should continue this week, at least for most major EM countries. The US 10-year yield remains near the bottom of recent ranges, which has proved supportive for EM local bonds. Over the past week, the 10-year local currency government bonds in Ukraine, Russia, and South Africa performed the best. 

China data has proven to be supportive for the global growth outlook, allowing EM equities to continue rallying. The 2000 level in the Shanghai index continues to provide a strong floor, too. Russian, Indian, and Hungarian stocks performed the best in the EM space this past week. EM FX should also benefit in this environment, and we still like BRL and INR as carry trades. Over the past week, CLP, ZAR, RUB, and HUF have been the best performers. While there is a risk that a dollar rally against the majors spills over into the EM space, we do not think the EM rally will be derailed.

China April data deluge continues with IP and retail sales due out Tuesday, expected to rise 8.9% y/y and 12.2% y/y, respectively. Money and loan data came out overnight, with new loans slightly weaker than expected but aggregate financing a bit firmer than expected. With real sector data stabilizing (albeit at modest levels), we downplay talk of another large-scale stimulus effort. In this framework of slow growth, we expect USD/CNY to continue drifting upward within a 6.20-6.30 range in Q2.

Mexico reports April ANTAD retail sales on Monday, expected to rise 1.5% y/y vs. -2.4% in March. Consumer confidence inched higher that month to 90.3 from 88.8 in March and 84.5 in February, so we could see stronger sales in April. Weak data has gone hand in hand with low inflation, as April headline CPI eased to 3.5% y/y, the lowest since October 2013. Recent data will feed into expectations that Banco de Mexico may have to cut rates again in H2. For USD/MXN, support seen near 12.90 and then 12.80, resistance seen near 13.00 and then 13.20.

Turkey reports March current account Tuesday, expected at -$3.3 bln vs. -$3.2 bln in February. The trade deficit came in better than expected that month, raising the risk of a better current account print as well. A consensus reading would lower the 12-month total deficit to -$59.9 bln, the lowest since September 2013. Still, improvement in the external accounts is being largely driven by contracting imports as the economy slows. For USD/TRY, support seen near 2.05 and then 2.00, resistance seen near 2.10 and then 2.15.

Hungary reports April CPI on Tuesday, expected to remain steady at 0.1% y/y. It then reports Q1 GDP on Thursday, with growth expected to remain steady at 2.7% y/y. The economy continues to recover, and so we would expect inflation to pick up as the year progresses. We think the easing cycle is over after the last 10 bp cut to 2.5%. For EUR/HUF, support seen near 302.50 and then 300, resistance seen near 305 and then 310.

India reports April WPI on Wednesday, expected to remain steady at 5.7% y/y. Earlier today, April CPI came in higher than expected at 8.6% vs. 8.5% consensus and 8.3% in March. As such, there is slight upside risk for WPI. Still, the RBI is likely to remain on hold now, with the next policy meeting scheduled for June 3. Markets are rallying on the prospects of a BJP win (official results on May 16), but we caution against too much exuberance as exit polls (out this week) are not that dependable. For USD/INR, support seen near 60.00 and then 59.50, while resistance seen near 60.50 and then 61.00.

South Africa reports March retail sales Wednesday, expected to remain steady at 2.2% y/y. Note March manufacturing production was much weaker than expected, up 0.7% y/y vs. 2.9% consensus. Weak data really calls into question the ability of the SARB to hike again. No move is seen at the May 22 meeting. For USD/ZAR, support seen near 10.25 and then 10.00, resistance seen near 10.50 and then 10.70.

Poland reports April CPI on Wednesday, expected to remain steady at 0.7% y/y. It then reports Q1 GDP on Thursday, expected to rise 3.1% y/y vs. 2.7% in Q4. The central bank kept rates and forward guidance steady in May, but noted that July may offer an opportunity to tweak forward guidance. For now, guidance is for steady rates until at least end-Q3. For EUR/PLN, support seen near 4.18 and then 4.16, resistance seen near 4.20 and then 4.22.

Singapore reports March retail sales on Thursday, expected at -3.0% y/y vs. -9.5% in February. Ex-autos, sales expected to rise 1.8% y/y vs. -9.2% in February. It then reports April trade on Friday, with NODX expected at -3.2% y/y vs. -6.6% in March. Data have come in on the soft side in Q1, but the MAS kept policy steady in April as the modest recovery continues. For USD/SGD, support seen near 1.2450 and then 1.2400, resistance seen near 1.2550 and then 1.2600.

Brazil reports March retail sales Thursday, expected at -0.4% y/y vs. 8.5% in February. Real sector data continue to come in soft, while inflation measures continue to point to rising price pressures. COPOM next meets May 28. April and May inflation data so far has not been as bad as expected, and this may allow COPOM to keep rates steady then. However, it is a close call. For USD/BRL, support seen near 2.20 and then 2.15, resistance seen near 2.25 and then 2.30.

Chile central bank meets Thursday, and is expected to keep rates 25 bp steady at 4.0%. Earlier expectations for a 25 bp cut were trimmed after CPI inflation spiked to 4.3% y/y in April, above the 2-4% target range. This is high to allow for a cut this month. Indeed, the peso surged last week CLP on that higher than expected CPI print for April. For USD/CLP, support seen near 550 and then 540, resistance seen near 560 and then 570.

Hong Kong reports Q1 GDP on Friday, with growth expected to remain steady at 3.0% y/y. The economy is holding up OK despite the mainland slowdown. We see no change in the HKD peg for the foreseeable future. 

Malaysia reports Q1 GDP on Friday, expected to rise 5.7% y/y vs. 5.1% in Q4. The economy is in recovery mode, which kept the central bank on hold at 3% last week. However, it signaled that it may need to adjust policy to avoid a buildup of financial and economic imbalances. Next meeting is July 10. A lot of data will be seen ahead of that meeting, but the bias to tighten should remain in place this year. For USD/MYR, support seen near 3.20, resistance seen nears 3.25.