EM FX was mixed last week, reflecting the dollar’s mixed performance against the majors. MXN, CLP, and MYR outperformed while CZK, ARS, and HUF underperformed. Whether EM FX can sustain this rally will depend largely on what sort of message the Fed delivers this Wednesday. While we see risks of a 50 bp cut, the data this week should underscore that the U.S. economy remains quite robust in Q3 and that a 25 bp cut should suffice.
AMERICAS
Colombia reports July real sector data. IP and retail will be reported Monday. IP is expected at -1.9% y/y vs. -4.0% in June, while sales are expected at 2.8% y/y vs. 1.5% in June. GDP proxy will be reported Wednesday. The economy is clearly slowing and so the central bank will continue cutting rates. At the last policy meeting July 31, the bank cut rates 50 bp to 10.75% by a 5-2 vote, with the two dissents in favor of a larger 75 bp cut. Since then, inflation has continued to fall to 6.12% y/y in August. Next meeting is September 30 and another 50 bp cut to 10.25% seems likely. The swaps market is pricing in 375 bp of total easing over the next 12 months that would see the policy rate bottom near 7.0%.
Brazil COPOM meets Wednesday and is expected to hike rates 25 bp to 10.75%. At the last meeting July 31, the bank sounded hawkish but did not seem to tip the start of a tightening cycle. Since then, IPCA inflation hit the top of the 1.5-4.5% target band in July before edging slightly lower, while the budget numbers have come in worse than anticipated. The swaps market is pricing in 100 bp of tightening by year-end and 175-200 bp of total tightening over the next 12 months.
EUROPE/MIDDLE EAST/AFRICA
Israel reported August CPI over the weekend. Headline accelerated to 3.6% y/y vs. 3.25 expected and actual in July, the highest since October and further above the 1-3% target range. At the last meeting August 28, the bank kept rates steady and Deputy Governor Abir noted “I would be very surprised if the conditions are in place for an interest rate cut before the end of the year. The surprise has been how long the war has been going on. This has slowed growth but has also had an impact on inflation, and it’s one of the reasons it is now once again out of our target range.” Next meeting is October 9 and no change is expected then. Despite the hawkish hold, the swaps market is still pricing in the start of an easing cycle over the next six months, with 50 bp of total easing seen over the next 12 months.
Turkey central bank meets Thursday and is expected to keep rates steady at 50.0%. At the last meeting August 20, the bank delivered a hawkish hold and reiterated that it would keep policy tight until “a significant and sustained decline in the underlying trend of monthly inflation is observed.” It added that “The alignment of inflation expectations and pricing behavior with projections has gained relative importance for the disinflation process.” However, the market is still pricing in the start of an easing cycle over the next three months.
South African Reserve Bank meets Thursday and is expected to cut rates 25 bp to 8.0%. At the last meeting July 18, the bank kept rates steady at 8.25% in a 4-2 vote, with the dissents in favor of a 25 bp cut. This was the first split vote since September 2023, and means that the bar to a cut has fallen significantly. Of note, the market is pricing in 25 bp of easing over the next three months and 125 bp of total easing over the next 12 months. Before the decision, August CPI and July retail sales will be reported. Headline is expected to fall a tick to 4.5% y/y, while core is expected to fall a tick to 4.2% y/y. If so, headline would be the lowest since April 2021 and right at the center of the 3-6% target range.
ASIA
People’s Bank of China sets its key 1-year MLF rate Wednesday. Commercial banks then set their Loan Prime Rates on Friday. All rates are expected to be kept unchanged. However, after China reported soft August money and new loan data as well as weak real sector data, we expect further stimulus in the coming weeks and months.
Bank Indonesia meets Wednesday and is expected to keep rates steady at 6.25%. However, the market is split as nearly a quarter of the 25 analysts polled by Bloomberg look for a 25 bp cut to 6.0%. At the last meeting August 21, the bank kept rates steady at 6.25% and Governor Warjiyo said that “In the third quarter, our focus is to further strengthen the stability of the rupiah.” He added that room for easing will likely open up towards the end of the year, which lines up with Bloomberg consensus for the first cut coming in Q4. Since then, CPI came in at 2.12% y/y vs. 2.13% in July and was the lowest since February 2022 and nearing the bottom of the 2-4% target range. We suspect BI will not cut rates ahead of the FOMC decision that same day, but with the rupiah trading at the strongest level since January, we see some risks of a dovish surprise.
Taiwan central bank meets Thursday and is expected to keep rates steady at 2.0%. At the last policy meeting June 13, the bank kept rates steady at 2.0%, but tightened liquidity by raising commercial bank reserve ratios 25 bp. Since then, inflation edged higher in June and July before falling a bit in August to 2.36% y/y. While the bank does not have an explicit inflation target, falling price pressures should allow it to keep rates on hold for now. Indeed, the swaps market sees steady rates over the next 36 months.
