EM FX ended the week on a soft note, despite the weaker than expected US retail sales report. Official concern about strong exchange rates is beginning to emerge. First, it was Korea, and then on Friday it was Brazil as acting President Temer said his country needs to maintain a balanced exchange rate, neither too weak nor too strong.
We expect more pushback to emerge if the current rally is extended. Still, the global liquidity outlook for now favors EM and "risk."
Looking at individual country risk, Brazil’s central bank is likely to continue selling reverse FX swaps to help limit BRL gains. In Russia, renewed tensions with Ukraine could continue weighing on the ruble. Turkey may be downgraded by Fitch, while higher than expected inflation data in India may derail the bond rally there.
Thailand reports Q2 GDP Monday, with growth expected to pick up slightly to 3.3% y/y. Optimists believe that the passage of the constitutional referendum will help improve sentiment and growth. The Bank of Thailand kept rates steady last week, ostensibly to maintain stability ahead of that vote. CPI rose only 0.1% y/y in July, and so we think the central bank will tilt more dovish if the economy remains sluggish after the referendum.
Singapore reports June retail sales Monday, which are expected to rise 2% y/y vs. 3% in May. It then reports July trade Wednesday, with NODX expected at -1.8% y/y vs. -2.3% in June. CPI came in at -0.7% y/y in June, and so deflation risks remain in play. If the real sector data remain soft, we think the MAS will likely ease again in October by adjusting its S$NEER trading band.
Israel reports July CPI Monday, which is expected to remain steady at -0.8% y/y. This is well below the 1-3% target range, but the central bank has been on hold since the last 15 bp cut back in February 2015. Israel then reports Q2 GDP Tuesday, with annualized growth expected at 2.1% vs. 1.7% in Q1. June manufacturing production will be reported Thursday. The central bank can’t be happy with recent shekel strength, as a weak currency is their main stimulus tool right now.
India reports July WPI Tuesday, which is expected to rise 2.84% y/y vs. 1.62% in June. July CPI was reported last week at a higher than expected 6.07% y/y, so there are upside risks to the WPI data. Rising price pressures kept the RBI on hold this month, at Governor Rajan’s last meeting. There is a risk that Modi chooses a dovish successor ahead of the next RBI policy meeting October 4. However, if inflation remains above the RBI’s 2-6% target range, a rate cut will be hard to justify.
Czech Republic reports Q2 GDP Tuesday, with growth expected to slow to 2.3% y/y from 3.0% in Q1. The central bank just kept policy steady this month and kept forward guidance for keeping current policies in place at mid-2017. Real sector data has been fairly robust this year, and so the bank can take a wait and see approach even as inflation creeps higher towards the 1-3% target range.
Colombia reports June retail sales and IP Tuesday. The former is expected to rise 1.5% y/y, while the latter is expected to rise 4.5% y/y. CPI rose a higher than expected 9% y/y in July, and so the bank may have to hike rates again at its next policy meeting August 31. The real sector has remained firm despite past tightening, and so the bank may not be as concerned about choking off growth with another hike.
South Africa reports June retail sales Wednesday, which are expected to rise 3.9% y/y vs. 4.5% in May. The economy remains soft, and so we think the SARB is likely on hold for the rest of the year. A lot of this depends on the rand, but recent firmness should help limit price pressures in the months ahead. As such, the SARB might be able to stay on hold at its next meeting September 22.
The Philippines reports Q2 GDP Thursday, with growth expected to slow to 6.6% y/y from 6.9% in Q1. The central bank last week kept rates steady, but acknowledged that a cut in reserve requirements is being studied. The bank is likely waiting to see how loose fiscal policy will be under new President Duterte before deciding on further easing. Next central bank meeting is September 22.
Chile reports Q2 GDP and current account data Thursday. Growth is expected to slow to 1.2% y/y from 2.0% in Q1. With CPI inflation at 4% y/y in July and likely to move back within the 2-4% target range in H2, we think the bank will tilt more dovish. A rate cut is possible towards year-end or in early 2017. The bank just left rates steady last week. Next policy meeting is September 15, and that’s probably too early to cut rates.
Poland reports July industrial and construction output, PPI, and retail sales Thursday. The data is expected to show some slowing. Even though the economy remains firm, deflation risks persist with CPI coming in at -0.9% y/y in July. For now, the central bank is likely to remain on hold but could ease again if conditions worsen. Next policy meeting is September 7, no change expected then.
Bank Indonesia meets Friday and is expected to cut rates. The bank is switching the benchmark rate to the 7-day reverse repo in order to improve the effectiveness of monetary policy, and it is expected to cut that rate 25 bp to 5.0% at this meeting. Inflation was 3.2% y/y in July, near the bottom of its 3-5% target range. If inflation remains low, it will give BI leeway to cut rates more in the coming months.
Fitch will announce a ratings decision for Turkey on Friday. Last Friday, Moody’s said it would render a decision on Turkey within 90 days of its review, which began on July 18. Like Fitch, Moody’s Baa3 rating is at the lowest rung of investment grade. With S&P quickly cutting Turkey to BB with a negative outlook, one more downgrade by either Moody’s or Fitch would likely lead to some forced selling. Our model rates Turkey at BB/Ba2/BB and so we think a downgrade is warranted.