Emerging Markets: Preview of the Week Ahead

(from my colleague Dr. Win Thin)

EM currencies remain soft ahead of the FOMC meeting Wednesday.  The Fed is widely expected to modify the language in its forward guidance, which would be consistent with the first rate hike that is expected around mid-2015.  This would be unequivocally negative for EM.  Indeed, lower commodity prices and the looming turn in the US interest rate cycle are likely to maintain downward pressure on EM currencies well into next year.

The dollar is making multi-year highs against most EM currencies, and this trend should continue.  Some problems are idiosyncratic (Brazil, Turkey, Russia) while others are simply suffering from widespread negative commodity and EM sentiment (Chile, Colombia, Mexico, South Africa, India).  Greater differentiation amongst EM FX is being seen, with the standard deviation of FX changes in 2014 YTD above 10% for the first time since 2009.  This supports our view that fundamentals will remain a major factor for currency under- and out-performance in the current market conditions.

Israel reports November CPI Monday, expected at -0.2% y/y vs. -0.3% in October.  With deflation risks still strong, we believe extraordinary measures could be seen in 2015. For now, however, the weak shekel will be the main policy lever to help boost growth.  Moody’s noted that the government collapse is “credit negative.”  Still, our own ratings model shows Israel as a solid A+/A1/A+ credit, and see little downgrade risk to actual ratings of A+/A1/A.

Colombia reports October retail sales and IP.  The former is expected to rise 8.0% y/y, the latter by 0.3% y/y.  It also reports Q3 GDP, expected to grow 4.2% y/y vs. 4.3% in Q2.  The central bank also meets Friday and is expected to keep rates steady at 4.5%.  We think there will be a bias to ease in 2015, but it will be difficult to execute if the peso continues to weaken.  Officials are finally expressing concern about the weak peso, and this could help end its constant under-performance in EM.

HSBC flash China PMI for December will be reported Tuesday, expected at 49.8 vs. 50.0 in November.  Markets are braced for softer China data as well as further PBOC easing.  As such, a weak reading here may not have much negative impact.  We expect several more easing measures from the PBOC in the months ahead.  The PBOC continues to fix USD/CNY lower, at levels not seen since February.  However, the market continues to take spot USD/CNY higher.

Hungary central bank meets Tuesday and is expected to keep rates steady at 2.1%.  Deflation is deepening, with CPI -0.7% y/y in November vs. -0.4% in October.  We think the central bank will have to start preparing the markets for further easing in 2015.   Real sector data has been solid, but we think slowing eurozone growth will likely take a toll on 2015 growth.

Singapore reports November trade Wednesday, with NODX expected to rise 3.9% y/y vs. -1.5% in October.  CPI rose only 0.1% y/y in October, and deflation risks are building even as regional growth slows.  Stronger than expected October retail sales was likely an outlier.  We expect the MAS to loosen policy at its next policy meeting in April.

Thai central bank meets Wednesday and is expected to keep rates steady at 2.0%.  However, the market is split.  Of the 22 analysts polled by Bloomberg, 16 see no change and 6 see a 25 bp cut to 1.75%.  With inflation falling and the economy still weak, we think there is a strong case for a rate cut.  The baht has also been outperforming this year, so Thai exports are losing some competitiveness.  This could be addressed with some easing by the BOT.

Czech central bank meets Wednesday and is expected to keep rates steady at 0.05% and to maintain the koruna cap.  Despite modest improvement in the economic data, we believe headwinds on the economy will build.  We see current loose policies being maintained into 2016.

Poland reports November industrial output Wednesday, expected to rise 1.1% y/y vs. 1.6% in October.  On Thursday, the central bank releases minutes from its last meeting, when it kept rates steady at 2.0%.  Markets remain puzzled by the decision to keep rates steady in both November and December after the surprise October 50 bp cut, and so the minutes will be studied closely.  We think there is still a bias for easing, but will depend on the data.  November CPI came in at -0.6% y/y, and makes a strong case for further easing.

Taiwan central bank meets Thursday and is expected to keep rates steady at 1.875%.  Given slowing China growth and the weak yen, policymakers in Taiwan could move to a more dovish stance in 2015.  If nothing else, some greater currency weakness may be encouraged.

Mexico reports October INEGI retail sales Thursday, expected to rise 4.5% y/y.  Central bank minutes will be released Friday.  The policy statement was very dovish, and accentuated downside growth risks and the lack of demand-side inflation risks.  The minutes should be along the same lines, and we do not expect the bank to follow the Fed in raising rates next year.  The dollar auction program is likely to be triggered many times in the coming weeks, as the EM outlook remains very negative.

Brazil reports mid-December IPCA inflation Friday, expected to remain steady at 6.42% y/y.  It also reports November current account and FDI data Friday.  The former is seen at -$8.5 bln and the latter at $4.5 bln.  If consensus is correct, 12-month FDI will only cover about 70% of 12-month current account gap, the lowest since September 2010.  This trend is likely to continue; making Brazil more reliant on hot money.  The current account should continue to worsen as exports plunge, while lower commodity prices suggest FDI inflows into resource extraction industries may slow.  The fundamental backdrop for Brazil remains horrible.