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EM Preview for the Week Ahead

(from my colleague Dr. Win Thin)

PBOC fixed USD/CNY higher for the second straight day today, as the string of CNY gains appears to be over for the time being. Spot USD/CNY moved higher as well, in sympathy with the rest of EM FX weakening. China April IP and retails sales rounded out the April data deluge, with the former rising 9.3% y/y vs. expected 9.4% y/y and 8.9% y/y in March and the latter right at the expected 12.8% y/y vs. 12.6% y/y in March. Overall, April data was mixed, with surveys (PMIs) weaker than expected and some hard data (trade, loans) a bit firmer than expected. We continue to believe that China growth will stabilize around the 8% level, but the risks are tilted more towards 7.5-8.0% than 8.0-8.5%.

On Friday, USD/BRL traded at its highest level since January 28 near 2.0296, just shy of 2.03. It has opened lower this week, trading near 2.0150 currently. Note that the central bank (BCB) last intervened via swap auctions on March 27 to limit currency weakness, when BRL was trading just below 2.03 (at a high that day near 2.0279). Before that, BCB intervened on January 28 and drove the pair lower from a high around 2.0366 down to a low of 1.9945 that day. Our point is simply that BCB may come in this week to help stabilize the real if weakness continues. However, predictability is not their strong point and so we don't have strong conviction on this. Brazil reports March retail sales Wednesday, and is expected to show some modest improvement. Support for USD/BRL likely near 2.00, resistance near 2.03 and then 2.05.

The Indonesian central bank holds a policy meeting Tuesday, with no change in policy expected. BI is one of the few central banks not in easing mode, as rates have remained at 5.75% since February 2012. Inflation has eased a bit but remains too elevated to consider cutting rates now. CPI rose 5.6% y/y in April, above the 3.5-5.5% target for the second straight month. GDP growth remains robust at 6.1% y/y in Q1, slightly slower than 6.2% y/y in Q4 but still fairly strong. USD/IDR remains in the 9600-9900 trading range that has held since Q4 2012. With little export overlap with Japan, Indonesia is not as vulnerable the weak yen as Korea, Taiwan, and others in EM, and so relatively high yield on IDR could help it hold up well in the current trading environment.

The Turkish central bank holds a policy meeting Thursday, and another 25 bp cut in policy rates is expected. Some are looking for a bigger 50 bp cut this month after the bank delivered a dovish surprise at its April meeting, when it cut policy rates by 50 bp across the board. Since then, average cost of funding (COF) for banks has dropped sharply to right around the 1-week repo rate of 5%. Because of this, it is likely that the repo rate will be cut this month in order to give the central bank more room to cut COF further. Inflation slowed sharply to 6.1% y/y in April, back within the 3-7% target range for the first time since December 2012. The deciding factor will likely be the exchange rate, as the REER stood at 121.10 in April and above the 120 level that has been identified as concerning. USD/TRY looks to have established a base near 1.79 for a move higher. On the upside, resistance is seen near 1.81 and then 1.83.

The Chilean central bank holds a policy meeting Thursday, with consensus for no change in the policy rate of 5.0%. We do, however, think the chances of a dovish surprise have risen. The real sector is slowing, and so we think a rate cut comes sooner rather than later. Q1 GDP will be reported next week, and monthly data suggest a slowdown to around 4.5% y/y from 5.7% y/y in Q4. This would be the slowest since Q3 2011. April CPI was much lower than expected at 1.0% y/y vs. 1.4% consensus and 1.5% y/y in March. Inflation has now been below the 2-4% target range for four straight months. If not on May 16, we think a rate cut on June 13 seems very likely. Support seen near 470 for USD/CLP, but upside is likely to be tested near-term. Resistance seen near 475, 480, and 486.

India reports April CPI and WPI this week. CPI was reported today at 9.4% y/y, lower than expected and the lowest since March 2012. This points to downside risk for WPI, which is due out tomorrow and expected at 5.45% y/y vs. 5.96% y/y in March. Inflation appears to have peaked in Q1, and will likely lead to more pressure on the RBI to continue easing. This will likely lead to some increased tension, as RBI Governor Subbarao said last week that the possibility of more easing is “practically non-existent.” The week before that, the RBI cut policy rates by 25 bp, as expected. RBI (and the market) was disappointed by the relatively meek budget for FY2013/14, which along with the wide current account deficit could keep the rupee under pressure. USD/INR is testing the 55 area. Break above targets 55.50 and then 5600, highs from the past six months. Support seen near 54.50 and then 54.00.

Hungary and Czech Republic both report Q1 GDP on Wednesday. Both are expected to show some improvement from Q4, but recession will likely continue well into 2013. Hungary and Poland report April CPI this week, and continued disinflation in both countries should allow for continued rate cuts ahead. All three CEE currencies should continue to under perform due to negative spillover from the euro zone recession and the resulting dovish policy response in these countries. For EUR/HUF, support seen near 292 and 290, resistance near 295, 300, and 303. For EUR/PLN, support seen near 4.12 and 4.10, resistance near 4.16, 4.18, and 4.20. For EUR/CZK, support seen near 25.60 and 25.40, resistance near 26.00 and then 26.12.

Mexico reports April ANTAD retail sales Wednesday and Q1 GDP Friday. Both are expected to show significant weakness, and this will keep alive expectations for more rate cuts. GDP is seen slowing to 1.1% y/y from 3.2% y/y in Q4, and this would be the weakest since Q4 2009. Banxico minutes last week were less dovish than expected, which supports our view that the central bank is in no hurry to cut rates with inflation well above target. USD/MXN could not sustain last week’s move below 12, and appears to be back in the now-familiar 12.00-12.20 range.

EM Preview for the Week Ahead EM Preview for the Week Ahead Reviewed by Marc Chandler on May 13, 2013 Rating: 5
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