Emerging Markets: Week Ahead

(from my colleague Dr. Win Thin)

We view current EM weakness as corrective in nature. Events this week should feed into what we see as a constructive backdrop for EM. While US jobs data should show continued improvement, it won’t be enough to move the Fed from its current path of tapering and 2015 rate hike. This sweet spot of stronger US growth without near-term tightening should persist into 2015. The ECB is widely expected to ease, which in theory should benefit EM too.

Mexico reports May PMI Monday. May consumer confidence comes out Thursday and is expected at 90.4 vs. 90.3 in April. Banco de Mexico meets Friday and is expected to keep rates steady at 3.5%. With data yet to show any sort of significant pickup this year, we expect the central bank to deliver another dovish message. If data do not improve in Q2, we think a rate cut in H2 becomes likely. For USD/MXN, support seen near 12.80, resistance seen near 13.00.

Brazil reports May trade Monday, with exports seen -4.7% y/y and continuing the contractionary trend. On Wednesday, it reports April IP and is expected at -6.1% y/y vs. -0.9% in March. COPOM minutes will be released Thursday, and should provide some more background on its decision to keep rates steady at 11%. May IPCA inflation will be reported Friday, expected to rise 6.33% y/y vs. 6.28% in April. Inflation appears to be topping out, supporting steady rates for now. May PMI fell to 48.8 from 49.3, and points to manufacturing weakness ahead. For USD/BRL, support seen near 2.20, resistance seen near 2.30.

Korea reports May CPI Tuesday, expected to rise 1.6% y/y vs. 1.5% in April. This would still be below the 2.5-3.5% target range, and gives the BOK leeway to stand pat for the time being as the economy recovers. Indeed, with May trade (exports -1% y/y) and PMI (49.5) coming in weak, we think the case for tightening this year is not very strong. For USD/KRW, support seen near 1020 and then 1000, resistance seen near 1030 and then 1040.

China official non-manufacturing PMI will come out Tuesday, along with the final HSBC manufacturing PMI. Over the weekend, official manufacturing PMI was reported at 50.8 vs. 50.7 consensus and 50.4 in April. Until the recovery gets stronger, we expect more targeted stimulus. We also see USD/CNY continuing to drift upwards in the 6.20-6.30 range. 

Reserve Bank of India meets Tuesday and is expected to keep rates steady. With growth remaining sluggish in Q1 (GDP rose 4.6% y/y, same as the revised Q4 rate) and price pressures falling, we may see the easing cycle starting in H2. The RBI continues to rebuild reserves, which should slow further downside for USD/INR. Support seen near 59.00, resistance seen near 60.00.

Turkey reports May CPI Tuesday, expected to rise 9.9% y/y vs. 9.38% in April. Core is seen accelerating to 9.8% from 9.74%. That the central bank cut rates last month even though price pressures are still rising is quite worrisome, and calls into question its independence. Its next meeting is June 24, and further easing now while inflation is still rising will hurt investor confidence. May PMI fell to 50.1 from 51.1, and points to manufacturing weakness ahead. For USD/TRY, support seen near 2.05, resistance seen near 2.15. 

Singapore reports May PMI Tuesday, expected at 51.3 vs. 51.1 in April. The improved China outlook should be good for Singapore. However, the economic recovery remains muted and so should keep MAS policy on hold for the time being. For USD/SGD, support seen near 1.2550 and then 1.2500. resistance near 1.26 and then 1.2650.

 

Poland central bank meets Tuesday and is expected to keep rates steady at 2.5%. The economy continues to recover, but the central bank remains concerned about its durability. May PMI fell to 50.8 from 52.0, and points to manufacturing weakness ahead. The July meeting will be very important, as Governor Belka has highlighted potential for pushing out its forward guidance from the current one of steady rates until at least end-Q3. For EUR/PLN, support seen near 4.14, resistance seen near 4.16. 

Czech Republic reports Q1 GDP Wednesday, with growth expected to remain steady at 2% y/y. It then reports April retail sales (6.0% y/y consensus) on Thursday, followed by trade, IP (7.0% y/y consensus), and construction output on Friday. Deflation risks remain in play, as CPI rose only 0.1% y/y in April. No change in policy is expected at the next policy meeting June 26. We see the 27.00 floor for EUR/CZK extended well into 2015.

Hungary reports April retail sales Wednesday, expected to rise 7.5% y/y. It then reports April IP on Thursday, expected to rise 7.1% y/y. In Hungary too, deflationary risks remain strong even though the economy is picking up. There is potential for another small rate cut at the next central bank meeting on June 24. On the political front, the Supreme Court is expected to rule Tuesday on the FX loans issue. For EUR/HUF, support seen near 303 and then 300, resistance seen near 305 and then 310.

Philippines reports May CPI Thursday, expected to rise 4.2% y/y vs. 4.1% in April. This is in the top half of the 3-5% target range, but the economy is slowing. GDP growth was softer than expected in Q1, up 5.7% y/y and the slowest since Q4 2011. For now, we see steady rates. Next policy meeting is June 19. For USD/PHP, support seen near 43.50, resistance seen near 44.00 and then 44.50.

Chile reports May CPI on Friday, expected to rise 4.7% y/y vs. 4.3% in April. Data reported last week (manufacturing, retail sales) were weak, and points to the need for further easing. However, inflation remains above the 2-4% target and minutes from the last central bank meeting out on Monday suggest no rate cut on June 12. The central bank kept rates steady at 4% in both April and May after 25 bp cuts each in both February and March. Easing should resume in H2, provided the inflation trajectory improves. For USD/CLP, support seen near 550 and then 540, resistance seen near 560 and then 570.