EM FX was mostly weaker last week as the broad dollar rally continued. BRL, CLP, and MYR outperformed while ZAR, RON, and PLN underperformed. Strong U.S. data is keeping the Fed hawkish, and the next cut has been pushed out to September. Inflation and retail sales data this week should underscore this “higher for longer” backdrop and that means the dollar rally is likely to continue. China continues to disappoint and so EM FX should remain under pressure.
AMERICAS
November GDP proxies will continue to roll out. Chile reported already and growth slowed two ticks to 2.1% y/y. Peru reports Wednesday and growth is expected to slow two ticks to 3.2% y/y. Brazil reports Thursday and growth is expected to slow to 4.40% y/y vs. 7.31% in October. The regional outlook remains soft and so we expect most central banks to continue easing, despite the risks for their currencies.
Colombia reports November real sector data Friday. Retail sales, IP, and trade data will all be reported. Sales are expected at 5.0% y/y vs. 9.0% in October, while IP is expected at 0.3% y/y vs. -0.6% in October. The swaps market is pricing in 100 bp of total easing over the next 12 months that would see the policy rate bottom near 8.5%.
EUROPE/MIDDLE EAST/AFRICA
Czech Republic reports December CPI data Monday. Headline is expected at 3.3% y/y vs. 2.8% in November. If so, it would be the highest since December 2023 and above the 1-3% target range. At the last meeting December 19, the bank kept rates steady at 4.0% and Governor Michl noted “The disinflation process in the core components of the consumer basket, especially in the services sector, is not yet complete. For these reasons, the bank board decided to pause the interest-rate reduction process for the time being.” He stressed that “We are leaving all options open, but for now we regard this as a pause in interest-rate cuts.” The swaps market agrees and is pricing in further modest easing.
Hungary reports December CPI Tuesday. Headline is expected at 4.4% y/y vs. 3.7% in November. If so, it would be the highest since December 2023 and above the 2-4% target range. Central bank minutes will be released Wednesday. At that December 17 meeting, the bank kept rates steady at 6.50% and Deputy Governor Virag said it was ready to keep rates unchanged for a “sustained period” if conditions warrant. He stressed that “Maintaining the key interest rate at 6.5% is an important pillar of monetary policy.” The swaps market is pricing in steady rates over the next 12 months.
Israel reports December CPI Wednesday. Headline is expected to remain steady at 3.4% y/y. If so, it would remain at the lowest since August but still above the 1-3% target range. At the last meeting January 6, the Bank of Israel kept rates steady at 4.5% but it was a dovish hold due to the updated rate path. It now sees the policy rate at 4.0-4.25% in Q4 2025. At the October 9 meeting, the bank saw the rate at 4.5% in 3Q 2025 and so it is teeing up the start of an easing cycle late this year. The bank also lowered its forecast for 2025 inflation to 2.6% in 2025 vs. 2.8% in October, and forecasts 2026 inflation of 2.3%. The swaps market is still pricing in steady rates over the next three months followed by 25 bp of easing over the subsequent three months.
National Bank of Poland meets Thursday and is expected to keep rates steady at 5.75%. At the last meeting December 4, the bank kept rates steady at 5.75%. However, Governor Glapinski unexpectedly pushed out his outlook for rate cuts to 2026 from mid-2025 because the inflation outlook has become more “complicated.” His updated view exposed a rift on the MPC, as several members said they still expect to start discussing easing in March. According to MPC member Kotecki “the position of the central bank’s governor is not the position of the Monetary Policy Council…Unfortunately, these comments are probably dictated by some political considerations.” The swaps market is pricing in steady rates over the next three months followed by almost 50 bp of easing over the subsequent three months. December core CPI will also be reported Thursday and is expected to fall a tick to 4.2% y/y.
ASIA
China reports December new loan and money supply data sometime this week. New loans are expected at CNY779 bln vs. CNY578 bln in November, while aggregate financing is expected at CNY2.158 trln vs. CNY2.326 trln in November. Despite stimulus so far, new loans continue to slow to all-time lows. More aggressive stimulus is needed, as well as more aggressive structural reforms.
China reports December trade data Monday. Exports are expected at 7.5% y/y vs. 6.7% in November, while imports are expected at -1.0% y/y vs. -3.9% in November. Declining imports is a sign of weak domestic demand activity. Meanwhile, China cannot rely on exports to sustain a recovery in economic activity and needs to stimulate consumer spending.
Q4 GDP and December IP, retail sales, FAI, property investment, and home prices will all be reported Friday. GDP is expected to grow 1.6% q/q vs. 0.9% in Q3, while the y/y rate is expected at 5.0% vs. 4.6% in Q3. On an annual basis, GDP growth is forecast to nearly hit the government’s 5% target for this year. Elsewhere, IP is expected to remain steady at 5.4% y/y while sales are expected at 3.6% y/y vs. 3.0% in November. Fixed asset investment growth is projected at 3.3% YTD vs. 3.3% in November. We remain skeptical that the stimulus measures announced so far will have much lasting impact on the economy. To escape the debt-deflation loop, Chinese policymakers need to ramp up fiscal measures to boost consumption.
India reports December CPI data Monday. Headline is expected at 5.30% y/y vs. 5.48% in November. If so, it would be the lowest since August and further within the 3-6% target range. WPI will be reported Tuesday and is expected at 2.30% y/y vs. 1.89% in November. At the last meeting December 6, the Reserve Bank of India kept rates steady at 6.5%. However, it was a dovish hold as the vote split to hold shifted to 4-2 from 5-1 at the last meeting October 9, with the dissents in favor of a 25 bp cut. Furthermore, the RBI unexpectedly cut the cash reserve ratio 50 bp to 4.0%. Governor Das said that “At this critical juncture, prudence and practicality demand that we remain careful and sensitive to the dynamically evolving situation,” but added that if the economy slows further, “it may need policy support.” Next RBI meeting is February 7. The swaps market is pricing in 50 bp of easing over the next three months.
Bank Indonesia meets Wednesday and is expected to keep rates steady at 6.0%. At the last meeting December 18, Bank Indonesia kept rates steady at 6.0% and Governor Warjiyo said, “The focus of monetary policy is directed at strengthening the stability of the rupiah exchange rate from the impact of heightened global economic uncertainty due to U.S. policy direction and escalation of geopolitical tensions in various regions.” He added that “we were assessing Trump’s policy steps in the U.S. because it affects the stability of global financial markets and impacts how we have to stabilize the rupiah and formulate monetary policy.” Until the rupiah stabilizes, rates are likely to be kept on hold.
Bank of Korea meets Thursday and is expected to cut rates 25 bp to 2.75%. The bank has cut rates 25 bp two straight meetings. At the last meeting November 28, it was a dovish surprise and three of the six board members were open to another cut over the next three months. Since then, the won has weakened nearly 6% against the dollar. However, the BOK has room to ease further as inflation is contained around its 2% target and uncertainty over the growth path remains high. The swaps market is pricing in the policy rate to bottom near 2.50% over the next 12 months.
