EM FX was mixed last week and reflected the dollar’s uneven performance after the post-NFP jump. ZAR, KRW, and PEN outperformed while IDR, INR, and ARS underperformed. We believe the U.S. exceptionalism story continues to hold and should power the dollar higher. Meanwhile, softer growth and falling inflation data should keep most EM central banks in easing mode, putting further pressure on EM FX.
AMERICAS
Mexico reports mid-January CPI data Thursday. Headline is expected at 3.72% y/y vs. 3.99% previously, while core is expected at 3.68% y/y vs. 3.69% previously. If so, headline would be the lowest since February 2021 and further within the 2-4% target range. At the last meeting December 19, Banco de Mexico cut rates 25 bp to 10.0% by a unanimous decision, though nearly a quarter of the analysts looked for a larger 50 bp move. However, it noted “The Board expects that the inflationary environment will allow further reference rate reductions. In view of the progress on disinflation, larger downward adjustments could be considered in some meetings, albeit maintaining a restrictive stance.” Despite the dovish guidance, the swaps market is pricing in only 100 bp of easing over the next 12 months that would see the policy rate bottom near 9.0%.
Brazil reports mid-January IPCA inflation Friday. Headline is expected at 4.34% y/y vs. 4.71% in mid-December. If so, this would be the second straight deceleration to the lowest since mid-September and back within the 1.5-4.5% target range. At the last COPOM meeting December 11, the central bank unexpectedly hiked rates 100 bp to 12.25% and promised more jumbo cuts ahead. Most were looking for a 75 bp move. The bank stated that “In light of a more adverse scenario for inflation convergence, the Committee anticipates further adjustments of the same magnitude in the next two meetings, if the scenario evolves as expected.” The swaps market is pricing in 400 bp of further tightening over the next 12 months.
EUROPE/MIDDLE EAST/AFRICA
National Bank of Poland publishes its December minutes Monday. At that December 4 meeting, the central bank kept rates steady at 5.75% and Governor Glapinski reversed his earlier guidance and pushed out the expected timing of the next cut into 2026 vs. mid-2025 previously. This exposed a rift on the MPC, as several members said they still expect to start discussing easing in March. Last week, the bank kept rates on hold again and Glapinski stressed that the rate cut discussion must be delayed “for some time.” However, he said the bank will cut rates “as soon as it’s possible” based on the data. The swaps market is still pricing in 25 bp of easing over the next three months.
South Africa reports December CPI data Wednesday. Headline is expected to pick up three ticks to 3.2% y/y while core is expected to pick up a tick to 3.8% y/y. If so, headline would accelerate for the second straight month and move back into the 3-6% target range. At the last meeting November 21, the South African Reserve Bank cut rates 25 bp to 7.75% and Governor Kganyago said, “As a central bank in a small, open economy, caution is what’s going to be at play here.” Its model also adjusted the expected rate path high, with the end-2025 policy rate seen at 7.40% vs. 7.17% previously, end-2026 at 7.27% vs. 7.09% previously, and end-2027 at 7.28%. The swaps market is slightly more hawkish and sees the policy rate bottoming at 7.5%.
Turkey central bank meets Thursday and is expected to cut rates 250 bp to 47.5%. In a rare occurrence, every analysts polled by Bloomberg is looking for 250 bp. The bank started easing at the December 26 meeting by cutting rates 250 bp to 47.5%. Easing inflation pressures leaves room for the bank to cut rates further. Headline CPI fell to 44.38% y/y vs. 47.09% in November, the lowest since June 2023, and core dipped to 45.34 y/y vs. 47.13% in November, lowest since February 2022. The market is pricing in 17 percentage points of total easing over the next 12 months that would take the policy rate to 30.5%.
ASIA
Taiwan reports December export orders Tuesday. Orders are expected at 18.8% y/y vs. 3.3% in November. If so, it would be the strongest since February 2022 but due largely to low base effects. Q4 GDP data will be reported Friday. Growth is expected at 2.0% y/y vs. 4.17% in Q3. If so, it would be the slowest since Q3 2023. Regional growth and activity remains at risk from slow mainland growth. As such, we believe low price pressures will allow the central bank to cut rates this year if the economy slows too much.
Malaysia reports December CPI data Wednesday. Headline is expected to remain steady at 1.8% y/y. Bank Negara meets later that day and is expected to keep rates steady at 3.0%. While the bank does not have an explicit inflation target, low price pressures should allow it to ease this year if the economy slows. At the last meeting November 6, the bank kept rates steady at 3.0% and suggested cuts are not in the pipeline just yet. The post-meeting statement highlighted that “inflation is expected to remain manageable” and “the latest indicators point towards sustained strength in economic activity.” The swaps market is pricing in 25 bp of easing over the next 12 months.
Korea reports Q4 GDP data Thursday. Growth is expected at 0.2% q/q vs. 0.1% in Q3, while the y/y rates is expected at 1.4% vs. 1.5% in Q3. Bank of Korea left rates steady at 3.0% vs. an expected 25 bp cut. The bank had cut rates 25 bp two straight meetings but said that FX uncertainty was one of the reasons for this current hold. Governor Rhee said there was one dissent in favor of a cut but added that all six members of the board saw a “great chance” of a cut over the next three months. Rhee added that political stability was most important for the economy now and estimated that the exchange rate was about 30 won weaker due to political turmoil. The swaps market is pricing in steady rates over the next three months but still sees the policy rate bottoming near 2.50% over the next 12 months.
Singapore reports December CPI data Thursday. Headline is expected to fall a tick to 1.5% y/y while core is expected to fall three ticks to 1.6% y/y. If so, headline would move back near the cycle low and core would be the lowest since November 2021. The Monetary Authority of Singapore then meets Friday. While the MAS does not have an explicit inflation target, low price pressures should allow it to ease policy in 2025 if the economy slows too much. This week’s meeting is probably too soon, as MAS chief Chia said recently that its current policy setting is still appropriate for now.
