Emerging Markets: Preview of the Week Ahead

(from my colleague Dr. Win Thin)

The situation in Crimea remains tense and has impacted global markets.  In particular, Russian equities are down nearly 12% on the day, while the ruble basket continues to trade outside of today’s 35.40-42.40 corridor, necessitating large-scale FX intervention to bring it back within it.  The central bank of Russia was forced today to hike its main policy rate 150 bp to 7%, and we suspect more hikes will be needed as pressures are likely to continue.  USD/RUB made a new all-time high today near 37.00.

The IMF will visit Ukraine this week to start discussions on an aid program.  The most delicate area of negotiations will center around energy subsidies, which the IMF estimates cost the government about 7% of GDP in 2012.  With subsidized prices from Russia likely to rise sharply, the need to reduce domestic subsidies will be greater than ever.  Yet to do it too fast will be very disruptive, and likely to plunge the economy into further turmoil.  Deeper and wider capital controls are likely if pressure on the hryvnia resumes.

Korea reports February CPI on Tuesday and is expected to remain steady at 1.1% y/y.  Korea reported February trade over the weekend, with exports rising 1.6% y/y vs. 2.9% consensus and imports rising 4.o% y/y vs. 4.6% consensus.  PMI was also reported, dropping to 49.8 from 50.9.  Next BOK meeting is March 13.  It has remained on hold since May 2013, when it cut rates 25 bp.  For USD/KRW, support seen near 1070 and then 1060, while resistance seen near 1080 and then 1090.

Hungary reports January retail sales Wednesday, expected to rise 2.2% y/y vs. 1.8% in December.  Central bank minutes will also be released Wednesday, while January IP will be reported Thursday (expected at 5.0% y/y vs. 4.4% in December).  While the economy is in modest recovery, the threat of deflation remains and so we believe further easing will be seen.  Next Meeting is March 25, and consensus sees a 10 bp cut to 2.6%.  For EUR/HUF, support seen near 310 and then 305, while resistance seen near 315 and then 320.

Brazil markets are closed Monday and Tuesday for Carnival holiday, but reports February trade on Wednesday.  The deficit is seen at -$3.0 bln vs. -$4.1 bln in January.  This will be followed by COPOM minutes on Thursday and February FIPE inflation on Friday.  Inflation readings at the producer and wholesale level are starting to tick up, and so the central bank will have to remain vigilant.  Indeed, we think there is potential for one last 25 bp hike at the April 2 meeting to 11%.  For USD/BRL, support seen near 2.30 and resistance seen near 2.35 and then 2.40.

Poland central bank meets and Wednesday and is expected to keep rates steady at 2.5%.  The combination of modest recovery and slightly faster inflation should keep the central bank on hold for the time being.  Many on the board feel a rate hike by mid-year is appropriate, but we think it will come later in the year, if at all.  The Polish economy has some exposure to Ukraine, and so there may be some headwinds ahead that argue for tightening later rather than sooner.  For EUR/PLN, support seen near 4.15 and resistance seen near 4.20 and then 4.25.

Malaysia central bank meets on Thursday and is expected to keep rates steady at 3.0%.  It also reports January trade on Friday.  Overall, the combination of modest recovery and slightly elevated inflation should keep the central bank on hold for the time being.  For USD/MYR, support seen near 3.25 while resistance seen near 3.30 and then 3.35.

Taiwan reports February CPI on Tuesday and trade on Friday.  CPI is seen rising 0.2% y/y vs. -0.8% in January.  Exports are seen rising 7.1% y/y vs. -5.3% in January and imports are seen rising 4.2% y/y vs. -15.2% in January.  January-February data will be distorted by Lunar New Year.  Combining the two months, consensus reading would see exports flat y/y and imports -7%.  For USD/TWD, support seen near 30.20 while resistance seen near 30.40.

Chile reports January monthly GDP proxy and releases central bank minutes (from last meeting when it cut 25 bp) on Wednesday.  February trade (consensus $650 mln surplus) and CPI (consensus 2.9% y/y) will be reported on Friday.  The bank highlighted potential for further easing, which should be reflected in the minutes.  Next meeting is March 13, and another 25 bp cut to 4.0% then is seen.  For USD/CLP, support seen near 560 and then 550, while resistance seen near 565 and then 570.

Mexico reports February PMI on Monday, consumer confidence on Wednesday, and CPI on Friday.  Manufacturing PMI is seen at 50.0 vs. 49.7 in January, while CPI is seen rising 4.2% y/y vs. 4.5% in January.  Recent data from Mexico has been disappointing, to say the least.  Next Banxico meeting is March 21, and if data remain soft, the central bank will have to acknowledge that its rosy scenario for 2014 is not quite playing out.  For USD/MXN, support seen near 13.20, while resistance seen near 13.40 and then 13.60.