Emerging Markets: Preview of the Week Ahead

(from my colleague Dr. Win Thin)

EM currencies have firmed over the past week, confirming our view that the global backdrop remains supportive for risk appetite. There is some negative headline risk from Argentina (see below) as well as general geopolitical tensions in the Middle East, but risk sentiment has generally held up well and has recovered rather quickly from such bouts of selling seen earlier this year.

The ECB meeting should underscore that DM monetary policy for the most part remains expansionary. In the US, another 200k or so gain in nonfarm payrolls would fit into our perceived “sweet spot” of modest gains in the economy that won’t move up the Fed’s tightening timetable. Lastly, China PMI readings this week should support our view that the mainland economy is stabilizing, albeit at lower levels.

Argentina has a payment on restructured bonds coming due today that will likely be missed. It was planning to make this payment on restructured debt whilst still negotiating with the holdouts, as Argentina deposited $1 bln last week with its bond trustee. However, the US court blocked the trustee bank from making any bond payments and ordered that money returned to Argentina. There is a 30-day grace period on this payment, and we see no quick resolution. However, it doesn’t help that Argentina is wasting precious time with its antics, including taking out a full page NYT ad. We continue to believe that a default event here will not have a wider-ranging impact on EM.

Korea reports June CPI on Tuesday, expected to rise 1.9% y/y vs. 1.7% in May. It also reports June trade later that day, with exports expected to rise 5.1% y/y and imports expected to rise 5.5% y/y. The external accounts have improved significantly, helping the won to outperform within EM. However, inflation remains below the 2.5-3.5% target range while the real sector recovery remains modest. We see steady rates for the rest of this year. For USD/KRW, support seen near 1000, resistance seen near 1020 and then 1030.

China reports official manufacturing PMI for June on Tuesday, expected at 51.0 vs. 50.8 in May. HSBC reports its final PMI reading for June later that day, expected to remain steady from the 50.8 flash reading. Official non-manufacturing PMI comes out on Thursday. Recent China data has showed the economy stabilizing. The yuan has been relatively firm this past month, with USD/CNY trading back at levels not seen since early April. This fits into our view that the one-way depreciation track has ended for now.

Indonesia reports June CPI on Tuesday, expected to rise 6.8% y/y vs. 7.3% in May. It also reports May trade the same day, with exports expected to drop -5.9% y/y vs. -3.2% in April. Recent IDR weakness has been puzzling, in light of continue foreign inflows in both equities and local currency bonds. USD/IDR finally reversed lower today after drifting higher to almost test the 2014 high near 12280. Support seen near 11800 then 11600, resistance seen near 12100.

Brazil reports June trade and PMI on Tuesday. Both exports and imports are seen contracting again. This will be followed by FIPE June inflation and May IP on Wednesday. Last week, wholesale and PPI measures of inflation showed continued deceleration, but this has yet to show up at the consumer level. The central bank is hoping this happens soon, as it has signaled that policy will remain steady for now. USD/BRL broke below 2.20 last week to trade at the lowest level since April 10, but no follow through was seen. Further losses for the dollar appear likely after the central bank also signaled comfort with the current exchange rate. After 2.20, the next support level comes in near 2.15, while resistance is seen near 2.25.

Poland central bank meets Wednesday and is expected to keep rates steady at 2.5%. Governor Belka has pointed to this meeting for a potential shift in its forward guidance. Inflation expectations for the next 12 months dropped to 0.2% in June from 0.5% in May. While the central bank had been leaning more dovish with its forward guidance, the situation has been complicated by the tape scandal. We don’t think a rate cut is likely, but would look for some extension of its forward guidance for tightening. For EUR/PLN, support seen near 4.15 and then 4.10, resistance seen near4.18 and then 4.20.

Turkey reports June CPI on Thursday, expected to rise 8.8% y/y vs. 9.7% in May. However, core is seen remaining elevated at 9.8% y/y, little changed from 9.77% in May. A drop in the headline rate would be welcomed, as the central bank has already cut rates 125 bp over the past two months even as inflation remained high. The external balances continue to improve, but mainly due to collapsing imports due to sluggish growth. This is why the bank is under so much pressure to ease ahead of the August presidential election. For USD/TRY, support seen near 2.10 and then 2.05, resistance seen near 2.15 and then 2.20.

Czech Republic reports May retail sales Friday, seen rising 3.1% y/y vs. 6.0% in April. Last week, the central bank kept rates steady, as expected, but turned a bit more dovish and said the koruna cap would be maintained until at least Q2. Recent data have come in on the soft side, while June CPI inflation (out July 9) is seen falling to 0.1% y/y from 0.4% in May. No wonder the central bank remains concerned.

Hungary reports May retail sales on Thursday, seen rising 6.3% y/y. It then reports May IP Friday, seen rising 11% y/y WDA vs. 10.1% in April. Last week, the central bank cut rates another 10 bp to 2.3% and signaled further easing is possible. However, we think the end of the easing cycle is nearing, as CPI inflation is set to pick up in H2 due to low base effects. For EUR/HUF, support seen near 305, resistance seen near310 and then 315.

Mexico reports June PMI on Tuesday and consumer confidence on Friday. Both are seen improving modestly but overall, we expect softness in the economy to continue near-term. We think it would take a significant downturn in the economy to get Banxico to cut rates again. For USD/MXN, support seen near 12.90 and then 12.80, resistance seen near 13.00 and then 13.10.