Emerging Markets Preview of the Week Ahead

(from my colleague Dr Win Thin)

EM currencies are trying to regain some traction after trading softer last week.  China data for July out this week should provide further evidence that the world's second biggest economy is stabilizing. Stronger than expected Taiwan export orders for June (up 10.6% y/y) should help support regional sentiment too.

After starting out firm so far on Monday, we believe EM FX will continue to gain this week, as the global economic backdrop should remain positive in Q3. External factors that could impact EM this week are centered largely in the geo-political sphere, with ongoing tensions in Ukraine and Gaza likely to provide some negative headline risk. Still, EM selling due to such headline risk has not been sustained in recent months, and we see this continuing this week as well.

Hungary central bank meets Tuesday and is expected to cut rates 10 bp to 2.20%. With inflation still non-existent, the bank has leeway for a bit more easing. However, we think the 2.0% area will prove to be a floor for the policy rate as low base effects should boost y/y inflation in H2. The economy is recovering nicely as well.

Brazil reports mid-July IPCA inflation on Tuesday, expected to rise 6.56% y/y vs. 6.41% in mid-June. COPOM minutes will be released Thursday. Inflation at the consumer level remains stubbornly high, even though producer and wholesale inflation has turned lower already. For now, we expect the central bank to stand pat and await justification for steady policy in the minutes. June current account data will be reported Friday.

Mexico reports May INEGI retail sales Tuesday, expected to rise 1.0% y/y vs. -0.4% in April. It then reports mid-July CPI on Thursday, expected to rise 3.96% y/y vs. 3.71% in mid-June. Core is seen rising to 3.15% y/y from 3.09% in mid-June. We expect the economy to start picking up in H2. Along with inflation nearing the top of the 2-4% target range, conditions should prevent further easing by Banco de Mexico. Mexico reports June trade data on Friday, as well as central bank minutes.

Singapore reports June CPI on Wednesday, expected to rise 2.2% y/y vs. 2.7% in May. It then reports June IP on Friday, expected at -0.8% y/y vs. -2.5% in May. Real sector data have come in soft recently, even as price pressures have eased. If this trend continues in Q3, there may by mounting speculation of a shift to an easing stance by MAS at its October meeting. For now, however, we think no change in policy is the most likely outcome.

South Africa reports June CPI on Wednesday, expected to rise 6.7% y/y vs. 6.6% in May. After last week’s 25 bp hike by SARB, this data may prove anti-climactic. However, stronger inflation pressures could lead to more hikes ahead in H2, despite the very weak economy. Anglo American last week said it would seek buyers for several mines, but said the decision was not a result of the five-month long strike earlier this year.

Poland reports June retail sales Wednesday, expected to rise 4.0% y/y vs. 3.8% in May. The economy remains in recovery mode even as price pressures remain low, and so we see steady policy from the central bank for now. The next policy meeting is September 3. Central bank survey of 1340 Polish companies shows expectations of accelerating growth in Q3 due to investment and foreign sales.

Colombia reports May retail sales and IP on Wednesday. The former is expected to rise 7.1% y/y vs. 7.2% in April, while the latter is expected to rise 4.0% y/y vs. -2.2% in April. The economy remains very strong, and should lead to more tightening ahead. The next policy meeting is July 31, and consensus is another 25 bp hike to 4.25%.

Korea reports Q2 GDP Thursday, expected to rise 3.7% y/y vs. 3.9% in Q1. The economy is slowing, and the BOK’s dovish message at this month’s meeting has some looking for a rate cut in H2. We are not convinced, but acknowledge that higher rates are very unlikely now. Still, foreign equity inflows continue, with $2.1 bln seen already in Q3 alone.

HSBC reports flash China PMI for July on Thursday, expected at 51.0 vs. 50.7 final in June. This will be the first reading for July, and should continue the string of firmer data from the mainland. Strong Taiwan export orders data for June point to regional export strength in H2.

Russia central bank meets Friday and is expected to keep rates steady at 7.5%. However, much will depend on how Russian markets fare this week, in the wake of the Malaysian Airlines tragedy. Further ruble weakness could lead to hawkish surprise this week, though it would be a tough call as more sanctions are expected. Another rate hike would hurt the economic outlook further.

Emerging Markets Preview of the Week Ahead Emerging Markets Preview of the Week Ahead Reviewed by Marc Chandler on July 21, 2014 Rating: 5
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