EM FX was weaker across the board as the dollar mounted a broad-based recovery as risk off impulses dominated. PHP, TRY, and PEN outperformed while BRL, KRW, and COP underperformed. The global outlook soured after President Trump confirmed that tariffs would go into effect as planned this week. Furthermore, risk off sentiment was boosted by the contentious Ukraine-U.S. meeting. This week brings key U.S. data that could go a long way toward allaying U.S. recession fears. Either way, the dollar smile is likely to remain in place while EM FX remains vulnerable.
AMERICAS
Chile reports February CPI data Friday. Headline is expected to fall two ticks to 4.7% y/y. If so, it would be the first deceleration since November but would remain well above the 2-4% target range. At the last meeting January 28, the central bank kept rates steady at 5.0%, as expected. It was a unanimous decision and the bank stressed “Inflation risks have increased, which reinforces the need for caution.” The bank also removed reference to further potential easing and instead noted that “the Board will evaluate the future movements of the monetary policy rate by considering the evolution of the macroeconomic scenario and its implications for the convergence of inflation.” The swaps market is pricing in steady rates over the next 12 months.
Mexico reports February CPI data Friday. Headline is expected at 3.77% y/y vs. 3.59% in January, while core is expected at 3.63% y/y vs. 3.66% in January. If so, headline would accelerate for the first time since October but would remain within the 2-4% target range. At the last meeting February 6, Banco de Mexico cut rates 50 bp to 9.5%, as expected. However, it was a dovish cut as the bank said “The Board estimates that looking forward it could continue calibrating the monetary policy stance and consider adjusting it in similar magnitudes.” The swaps market has reacted to the dovish signals and is now pricing in 150 bp of further easing over the next 12 months that would see the policy rate bottom near 8.0% vs. 8.5% before the February decision.
Colombia reports February CPI data Friday. Headline is expected at 5.15% y/y vs. 5.22% in January, while core is expected at 5.22% y/y vs. 5.39% in January. If so, headline would decelerate for the first time since November but would remain well above the 2-4% target range. At the last meeting January 31, the central bank delivered a hawkish surprise and kept rates steady at 9.5% vs. an expected 25 bp cut. It was a split decision, with 5 voting to hold and the 2 dissents in favor of 25 and 50 bp cuts. The bank cited “a context of fiscal uncertainty and a volatile exchange rate” and added that “External financial conditions have tended to become more restrictive with the new US government’s policies on trade, energy and migration, which could have inflationary effects.” The swaps market is pricing in 125 bp of easing over the next 12 months that would see the policy rate bottom near 8.25%.
EUROPE/MIDDLE EAST/AFRICA
Turkey reports February CPI data Monday. Headline is expected at 39.90% y/y vs. 42.12% in January, while core is expected at 41.10% y/y vs. 42.65% in January. If so, headline would be the lowest since June 2023 but would remain well above the 3-7% target range. The central bank then meets Thursday and is expected to cut rates 250 bp to 42.50%. At the last meeting February 6, the bank cut rates 250 bp for the second straight time to 45.00%, as expected. The swaps market is pricing in 1475 bp of total easing over the next 12 months that would take the policy rate to 30.25%, but this may be too optimistic if inflation continues to overshoot the bank’s updated year-end forecast of 24% from February (vs. 21% in November).
Czech Republic reports February CPI data Wednesday. Headline is expected to fall a tick to 2.7% y/y. If so, it would decelerate for the second straight month to the lowest since September. At the last meeting February 6, Czech National Bank cut rates 25 bp to 3.75%, as expected. It was a hawkish cut, however, as Governor Michl warned that “Economic growth will be driven mainly by household consumption and government debt. Both of these factors are inflationary and a risk for inflation going forward. That’s why the bank board must be very careful about further interest-rate cuts.” Despite the hawkish tone, the swaps market is pricing in 50 bp of further easing over the next six months.
ASIA
Caixin reports February PMIs this week. Manufacturing will be reported Monday and is expected to rise three ticks to 50.4. Services and composite PMIs will be reported Wednesday, with services expected to fall three ticks to 50.7. Over the weekend, official PMI readings came in firmer. Manufacturing came in at 50.2 vs. 49.9 expected and 49.1 in January, while non-manufacturing came in as expected at 50.4 vs. 50.2 in January. As a result, the composite rose a full point to 50.1. China’s annual “Two Sessions” National People's Congress meeting begins Wednesday. While detailed policy announcements are not expected, the sessions provide a valuable insight into the government’s fiscal and growth objectives.
Indonesia reports February CPI data Monday. Headline is expected at 0.55% y/y vs. 0.76% in January, while core is expected at 2.42% y/y vs. 2.36% in January. If so, headline would remain below the 2-4% target range. At the last meeting February 19, Bank Indonesia kept rates steady at 5.75%, as expected. Governor Warjiyo said “Stability is the most important thing for our economy to continue growing. That’s why we continue to be in the market and maintain the stability of the rupiah, especially when global turmoil is high.” This was a notable change from the January meeting, when he said “We have changed our stance, which is to pro-stability and growth.” Warjiyo added that he sees room for further cuts but that the timing will depend on the global situation.
Philippines reports February CPI data Wednesday. Headline is expected to fall three ticks to 2.6% y/y. If so, it would be the lowest since November and nearing the bottom of the 2-4% target range. At the last policy meeting February 13, the bank delivered a hawkish surprise and kept rates steady at 5.75% vs. an expected 25 bp cut. Governor Remolona stuck to his previous guidance for a total 50 bp of easing this year and added that a cut is possible at the next meeting April. The swaps market is pricing in 150 bp of total easing over the next 12 months that would see the policy rate bottom near 4.25%. Remolona also confirmed a cut in the reserve requirement is coming, adding “The timing is still under discussion but I think it will be fairly soon, maybe sooner than the middle of the year.” The bank last cut reserve requirements by 250 bp in October.
Thailand reports February CPI data Wednesday. Headline is expected at 1.13% y/y vs. 1.32% in January, while core is expected at 0.89% y/y vs. 0.83% in January. If so, it would be the first deceleration in headline since August and would move closer to the bottom of the 1-3% target range. At last week’s meeting, Bank of Thailand unexpectedly cut rates 25 bp to 2.0% vs. an expected hold. The bank noted that “The Thai economy is expected to expand at a slower pace than previously estimated due to the industrial sector being pressured by structural problems and competition from foreign products, as well as higher risks from trade policies of major economies.” Assistant Governor Sakkapop said that the 2% rate represents neutral policy, adding “The bar will be high next time.” The swaps market is pricing in 25 bp of easing over the next 12 months that would see the policy rate bottom near 1.75%. However, there are now some low odds of an additional 25 bp of easing.
Korea reports February CPI data Thursday. Headline is expected to fall a tick to 2.1% y/y while core is expected to remain steady at 1.9% y/y. if so, headline would decelerate for the first time since October to just above the 2% target. At last week’s meeting, Bank of Korea cut rates 25 bp to 2.75%, as expected. The decision was unanimous, but only 2 board members saw another cut over the next three months while 6 saw steady rates. The bank said that the cut was made to “mitigate downward pressure on the economy” and added that growth was expected to slow significantly. The central bank cut its 2025 growth forecast a couple of ticks to 1.5%, and Governor Rhee said “The outline of Trump’s tariff policies has now largely taken shape, and that prompted the downgrade from January.” Rhee added that market pricing of 2-3 cuts this year is similar to the bank’s assumptions. The swaps market is pricing in 50 bp of further easing over the next 12 months that would see the policy rate bottom near 2.25% vs. 2.5% at the start of last week.
Bank Negara Malaysia meets Thursday and is expected to keep rates steady at 3.0%. At the last meeting January 22, the bank kept rates steady at 3.0% and suggested that cuts are not in the pipeline just yet as the policy statement noted that “The monetary policy stance remains supportive of the economy and is consistent with the current assessment of inflation and growth prospects.” The bank also highlighted that “the strength in economic activity is expected to be sustained in 2025” while “inflation is expected to remain manageable.” Since then, headline inflation came in a tick lower than expected at 1.7% y/y in January. While the bank does not have an explicit inflation target, low price pressures should allow it to ease this year if the economy slows. The swaps market is pricing in 25 bp of easing over the next 12 months.
