Emerging Market Highlights for the Week Ahead

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

Emerging market currencies will remain under pressure this week. We continue to think that countries with poor fundamentals and high financing needs (twin deficits) will fare poorly as fears of scarcer global capital build ahead of the FOMC meeting this week.

Central bank of Turkey meets Tuesday, and is not expected to change policy rates. For now, the corridor mechanism continues to work as the central bank tightened liquidity last week by raising the average cost of funding from 4.5% to near 5.0%. This was in response to the weak lira, which has since stabilized. The corridor is currently 3.5-6.5%, and so there is some upside for the average COF before the central bank would need to raise the ceiling. 

However, the political situation remains very fluid, worsening over the weekend after some conciliatory signs from Erdogan last week. The risk, therefore, is for tighter policy. USD/TRY is likely to move higher as political risk worsens. Near term, resistance seen near 1.88, 1.90, and then the June high near 1.91, while support seen near 1.86, 1.85, and 1.84. 

South Africa reports May CPI on Wednesday, expected to remain steady at 5.9% y/y. Q1 current account is also due out that same day, and is expected to widen to -6.9% of GDP from -6.5% in Q4. We think the data will underscore the problems facing the country right now, namely high inflation and widening external deficits at a time when global capital flows are likely to start ebbing. Some signs of progress between the unions and mining companies are welcome, but we think social tensions will still
remain high. We think USD/ZAR should have trouble staying below 10 for an extended period of time. Support seen near 9.85 and then 9.50, resistance seen near 10.00 and then 10.37. 

Taiwan reports May export orders on Thursday, expected at -1.3% y/y vs. -1.1% y/y in April. The export-driven model of growth is clearly not working at a time of slowing global growth. Inflation remains very low, and would certainly justify monetary easing. However, we think that the focus will more likely be on keeping TWD competitive. Recent yen gains are welcome, as the TWD/JPY cross has fallen about 10% from its mid-May peak near 3.48. Much will also depend on mainland growth, and that is looking more problematic. For USD/TWD, support seen near 29.60 and then 29.40, resistance seen near 30.00 and then 30.20.

HSBC China flash PMI for June will be reported Thursday, expected to remain steady at 49.2. Slowdown fears are picking up in China. The official PMI improved in May to 50.8, but is seen as overstating IP. HSBC reading tracks IP better, and it fell back below 50 in May for the first time since October 2012. The failed bond auction on Friday (first in 2 years) continues to reverberate in markets. We think there is a fragile balance here, with (A) local financial institutions strapped for cash, (B) low interest rates driving depositors to seek higher yielding “wealth management products,” and (C) much of the additional funding coming from hot money inflows. On the latter, PBOC data released on Friday showed that inflows remained positive in May but slowed considerably. We think the need to attract capital is a major reason why PBOC continues to allow the yuan to appreciate. USD/CNY was fixed Monday at a new low just below 6.16. 

On Thursday, Poland publishes central bank minutes for the June meeting, when it cut rates 25 bp to 2.75%. Official comments suggest another 25-50 bp of easing is likely for this current cycle. We concur. Ahead of the minutes, Poland will report May wages and employment on Tuesday and May IP on Wednesday. Data seen coming in weak will likely justify further easing. We do not think officials are targeting any particular level for EUR/PLN, despite recent FX intervention on the spike above 4.30. For now, we see the 4.20-4.3 range holding. Break below 4.20 targets 4.15 and then 4.10, while break above 4.30 opens up a test of 4.35 and then 4.40.

Brazil reports mid-June IPCA inflation Friday, expected at 6.66% y/y vs. 6.46% y/y in mid-May. If so, this would be the highest rate since mid-November and back above the 2.5-6.5% target range. May current account data also due out Friday, and is expected at -$6.11 bln vs. -$8.3 bln in April. FDI is seen slowing to $2.9 bln vs. $5.7 bln in April. Brazil also is facing high inflation and widening external deficits at a time of slowing capital inflows, and that’s a major reason why recent
measures to shore up the currency have not gained much traction. USD/BRL continues to trade around the 2.15 area, just below the cycle high near 2.1650 from June 11. We expect sporadic FX intervention to prevent runaway BRL weakness, but we do not think the defense of the 2.15 area will be aggressive within the context of general dollar strength.

Mexico central bank minutes are due out Friday. Despite market expectations of a more dovish Banxico, we think the central bank sent a very consistent message as it kept rates steady in early June. After the decision was announced, the bank acknowledged softness in the economy but did not seem in any hurry to cut rates again. With inflation still well above the 2-4% target range, we think easing is highly unlikely near-term. For USD/MXN, support seen nears 12.60 and then 12.40, resistance
seen near 12.80 and then 13.00.

On Monday, the Reserve Bank of India met and kept policy unchanged, as expected. The weak rupee and still-high inflation were simply too much for the central bank to ignore. The fundamentals remain poor and the economic outlook remains weak. Given the lack of policy tools available to the authorities, we believe India is in for a period of subpar growth and rising downgrade risks. For USD/INR, support seen near 57.00 and then 56.00, resistance seen near 58.00 and then 59.00.

Emerging Market Highlights for the Week Ahead Emerging Market Highlights for the Week Ahead Reviewed by Marc Chandler on June 17, 2013 Rating: 5
Powered by Blogger.