Emerging Markets: Preview of the Week Ahead

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

China January data deluge starts up as markets reopened after the extended Lunar New Year Holiday on Friday.  Money and loan data could come out anytime this week, with markets looking for a sharp increase in new loans (CNY1.1 trln) and aggregate financing (CNY1.9 trln).  Trade comes out midweek, with exports expected to rise 1% y/y and imports 4% y/y.  CPI and PPI are due out Friday, expected at 2.4% y/y and -1.6% y/y, respectively.  January prints for retail sales and IP won't be released, and will instead be lumped into a two-month number with February due to Lunar New Year distortions.  With HSBC and official PMIs showing very modest improvement, we think markets are expecting data to be at or near December readings.  CNY/USD likely to continue trading in the recent 6.04-6.08 range.

South Africa reports Q4 unemployment and December manufacturing production on Tuesday.  Unemployment is seen ticking up slightly to 24.9%, while production is seen improving to 2.2% y/y vs. 0.3% in November.  Retail sales come out Wednesday, expected at 2.8% y/y vs. 4.2% in November.  With labor unrest picking up (union official shot and killed by police on Friday) ahead of May elections, we see more headwinds on ZAR than just poor fundamentals.  USD/ZAR tried but failed to make a clean break below the 11.00 area.  Further support seen near 10.75, while resistance seen near 11.25 and then 11.40-50.

Mexico reports December IP Tuesday, expected at 1.0% y/y vs. -1.4% in November.  Banco de Mexico releases its inflation report on Wednesday and its meeting minutes will be released on Friday.  January ANTAD retail sales will also be reported Wednesday.  Consumer confidence fell to 84.5 in January vs. 90.1 consensus and 89.7 in December, and this is the lowest reading since April 2010.  As much as we like the Mexican story, data has been coming very soft and calls into question the central bank's scenario for a stronger recovery this year.  Central bank statement after its last meeting was fairly upbeat, let's see what the minutes reveal. If recent trends continue, we think Banxico will have to start acknowledging the risks to its more upbeat macro outlook.  For USD/MXN, support seen near 13.20 and then 13.00, while resistance seen near 13.40 and then 13.55-60.

India reports December IP and January CPI on Wednesday.  The former is expected at -1.0% y/y vs. -2.1% in November, while the latter is expected at 9.2% vs. 9.9% in December. January WPI will be reported Friday, expected at 5.6% y/y vs. 6.2% in December.  Price pressures are easing, and so we think that the RBI tightening cycle may have ended with the unexpected 25 bp hike last month.  Still, the RBI has been fairly proactive under Rajan and we could see further action if the rupee comes under pressure again.  For USD/INR, support seen near 62.00 and then 61.00, while resistance seen near 63.20/30 and then 64.00.

Bank of Korea meets Thursday and is expected to keep rates steady at 2.5%.  Inflation was 1.1% y/y in January, well below the 2.5-3.5% target range.  Yet the economy remains sluggish, with exports and IP largely flat.  Domestic consumption is recovering very slowly.  If the economy slows in the coming months, we think the BOK will resume cutting rates.  Last move was a 25 bp cut back in May 2013.  Policymakers should be happy with recent won weakness, especially against the yen.  For USD/KRW, support seen near 1070 and then 1060, while resistance seen near 1090 and then 1100.

Bank Indonesia
meets Thursday and is expected to keep rates steady at 7.5%.  CPI inflation eased to 8.2% y/y in January, which should allow BI to hold off from hiking for the time being.  Target range is 3.5-5.5%, but the economy is slowing and so further tightening is not optimal.  As it is, pre-emptive hikes in 2013 have helped the rupiah hold up well during this recent bout of EM selling.  USD/IDR remains stuck in the 12000-12300 range since December. 

Turkey reports December current account, expected at -$7.4 bln vs. -$3.9 bln in November.  Trade deficit was larger than expected that month.  Consensus reading would see the 12-month current account gap widen to -$63.4 bln, the highest since May 2012.  S&P moved the outlook on Turkey’s rating from stable to negative.  We totally agree but this is not a surprise to us as our model has Turkey at BB/Ba2/BB.  Still, it is a reminder of Turkey’s deteriorating fundamentals.  S&P's BB+ is the lowest of the three.  Fitch and Moody's have Turkey at investment grade (Baa3 and BBB-, respectively), which increasingly looks premature.  USD/TRY is likely to see support near 2.20 and then 2.10, while resistance seen near 2.30 and then 2.40.

Brazil reports December retail sales Thursday, expected at 5.0% y/y vs. 7.0% in November.  Inflation continues to ease along with the sluggish economy.  As such, we believe the tightening cycle is nearing an end, with one more 50 bp hike to 11% likely on February 26.  For USD/BRL, support seen near 2.35 while resistance seen near 2.40 and then 2.45.  As we’ve noted before, BRL volatility has been steadily falling since December 2013.  On the other hand, ZAR and TRY vol has been rising over that same period. From a risk-adjusted perspective, we think BRL yielding 11% looks much better than TRY near 10% and ZAR near 6%. 

Peru’s central bank meets Thursday and is expected to keep rates steady at 4.0%.  The economy is at risk of further slowing, but inflation remains a bit too high to ease just yet.  At 3.1% y/y in January, inflation is above the 1-3% target range.  However, we see a dovish bias developing as the year progresses.  USD/PEN seen remaining in its recent 2.80-2.83 trading range. 

Hungary reports January CPI on Friday, expected to rise 0.2% y/y vs. 0.4% in December.  Q4 GDP will also be reported then, expected at 2.5% y/y vs. 1.8% in Q3.  The central bank meets February 18, and the continued disinflation (bordering on deflation) should keep the easing cycle going (consensus is a 10 bp cut to 2.75%) despite signs of economic pickup in Q4.  For EUR/HUF, support seen near 305 and then 300, while resistance seen near 310 and then 315.

Emerging Markets: Preview of the Week Ahead Emerging Markets:  Preview of the Week Ahead Reviewed by Marc Chandler on February 10, 2014 Rating: 5
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