by Risk assets are coming off a tough week. The dollar was bid across the board except for the yen, which outperformed slightly. The only EM currencies to gain against the dollar were KRW and CLP. The major US equity indices somehow managed to eke out very modest gains but stock markets across Europe sank as the viral spread threatens to slam economic activity again. Yet we have seen time and time again that the safe haven bid for the dollar eventually gives way to broad-based dollar weakness and we expect that to happen this week. Strong China growth in Q3 is expected to underpin risk sentiment and this should help EM gain some traction. AMERICAS Mexico reports mid-October CPI Thursday. Headline inflation is expected at 4.0% y/y vs. 4.1% in mid-September. If so,
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Risk assets are coming off a tough week. The dollar was bid across the board except for the yen, which outperformed slightly. The only EM currencies to gain against the dollar were KRW and CLP. The major US equity indices somehow managed to eke out very modest gains but stock markets across Europe sank as the viral spread threatens to slam economic activity again. Yet we have seen time and time again that the safe haven bid for the dollar eventually gives way to broad-based dollar weakness and we expect that to happen this week. Strong China growth in Q3 is expected to underpin risk sentiment and this should help EM gain some traction.
AMERICAS
Mexico reports mid-October CPI Thursday. Headline inflation is expected at 4.0% y/y vs. 4.1% in mid-September. If so, inflation would move back within the 2-4% target range for the first time since mid-August. This would give Banco de Mexico the opportunity to extend its easing cycle. Next policy meeting is November 12 and another 25 bp cut to 4.0% is expected. Most expect the cycle to end then but we see scope for extension into 2021 if disinflation continues and the peso remains relatively firm.
Brazil reports mid-October IPCA inflation and September current account and FDI data Friday. Inflation is expected to accelerate to 3.39% y/y from 2.65% in mid-August. If so, inflation would be the highest since February and would move back towards the center of the 2.5-5.5% target range. The central bank issued new and dovish forward guidance at its last meeting, as it views the recent acceleration in inflation as temporary. Yet the CDI market is pricing in a 25 bp hike in December followed by more tightening in 2021.
EUROPE/MIDDLE EAST/AFRICA
Poland reports September IP and PPI Tuesday. The former is expected to rise 3.7% y/y vs. 1.5% in August, while the latter is expected to fall -1.5% y/y vs. -1.2% in August. Real retail sales will be reported Wednesday and are expected to rise 2.0% y/y vs. 0.5% in August. With the economy picking up, investors are watching inflation readings. While PPI suggests little cause for concern, we noted that headline inflation is creeping higher to 3.2% y/y in September while core inflation of 4.3% y/y is the highest since December 2001. With the 2-yaer yield turning negative for the first time ever and the 10-year yield around 1.28%, it seems that the bond market has not yet taken much notice. This certainly bears watching.
National Bank of Hungary meets Tuesday and is expected to keep policy steady. On September 24, Hungary surprised markets with a 15 bp emergency hike in the one-week deposit rate to 0.75% and came just two days after a regularly scheduled meeting saw an unchanged policy rate. It said the hike was “to prevent the current uncertain environment from causing an increase in inflation risks.” Much of that concern was coming from a weak forint. After that emergency hike, EUR/HUF fell about 2.5% but has since recovered to pretty much flat. If the forint continues to weaken, we cannot rule out another hawkish surprise this week.
Russia reports September real retail sales Tuesday. Sales are expected to fall -2.1% y/y vs. -2.7% in August. The central bank meets Friday and is expected to keep rates unchanged at 4.25%. A handful of analysts see a 25 bp cut to 4.0%. CPI rose 3.7% y/y in September, the highest since October and nearing the 4% target. What’s more important for the central bank is the weak ruble, which has come under greater pressure due to low oil prices and the rising prospects of a Biden win next month. With the ruble still vulnerable, we think it would be risky for the bank to cut rates.
Israel reports September trade Wednesday. Exports have fallen y/y for seven straight months and eight of the past nine. No wonder policymakers want to encourage a weaker shekel. Bank of Israel meets Thursday. Rates are expected to remain steady at 0.10% but there is a risk that the bank expands its asset purchases in response to rising bond yields and a steepening curve. Also, recent shekel gains are likely to trigger a stronger response by the bank to prevent excessive appreciation. Of note, deflation eased slightly to -0.7% y/y in September but remains well below the 1-3% target range. Moody’s reviews its A1 sovereign rating Friday. Our own ratings model has Israel at A/A2/A and so a downgrade is warranted.
Turkey central bank meets Thursday and is expected to hike rates 150 bp. If so, this would take the benchmark 1-week repo rate to 11.75% and the Late Liquidity Window (LLW) rate to 14.75%. The market is split, however. Of the 19 analysts polled by Bloomberg, 2 see no change, one sees a 100 bp hike, 7 see a 150 bp hike, 3 see a 175 bp hike, and 6 see a 200 bp hike. After the surprise 200 bp hike last month, the central bank has continued to do backdoor tightening and boosted the average cost of funds to 12.18%, above the old LLW ceiling of 11.25% and moving closer and closer to the new LLW ceiling of 13.25%. Since the September 24 hike, USD/TRY has weakened another 4% and gone on to make new record highs and so we see risks of a hawkish surprise this week.
ASIA
China reports September IP, retail sales, and Q3 GDP data Monday. IP is expected to rise 5.8% y/y vs. 5.6% in August, while sales are expected to rise 1.6% y/y vs. 0.5% in August. More importantly, GDP is expected to grow 5.5% y/y vs. 3.2% in Q2. PBOC is expected to maintain its benchmark loan rates Tuesday. Yet money and loan data reported last week support our view that policymakers are relying on credit growth to sustain this recovery and this should continue for the time being. Despite last week’s signal that policymakers are growing uncomfortable with yuan strength, USD/CNY ended last week close to the lows of this cycle after a brief pop higher.
Taiwan reports September export orders Tuesday. Orders are expected to rise 7.2% y/y vs. 13.6% in August. If so, it would be the seventh straight month of y/y gains and points to a strong export performance will into 2021. September IP will be reported Friday and is expected to rise 6.28% y/y vs. 4.70% in August. Strong growth in mainland China is dragging much of the region up with it, including Taiwan. Yet geopolitical tensions are on the rise, with reports that mainland military aircraft entered Taiwan’s airspace last week.
Korea reports trade data for the first twenty days of October Wednesday. For the first ten days, exports fell -28.8% y/y and imports fell -19.5% y/y but weakness was largely due to two fewer working days this year. Adjusting for that, average daily exports rose 2.8% y/y. Like Taiwan, Korea is one of the regional economies that is benefitting from strong mainland growth. We think further monetary stimulus is unlikely unless we get a dramatic change in the global landscape. The BOK expects GDP at -1.3% for this year, but the substantial fiscal effort will continue helping the economy move along even as external demand picks up.
Singapore reports September CPI Friday. Deflation of -0.3% y/y is expected vs. -0.4% in August. The MAS does not have an explicit inflation target but lack of any price pressures support the dovish message it delivered at its policy meeting last week. It stated that “As core inflation is expected to stay low, MAS assesses that an accommodative policy stance will remain appropriate for some time.” It warned of a weak recovery and downside risks from still-challenging global demand, limited travel, a soft labor market, and ongoing public health concerns.
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EM Preview for the Week Ahead
Risk assets remain hostage to swings in market sentiment. Stronger than expected US jobs data last week was welcome news. However, the tug of war between improving economic data and worsening viral numbers is likely to continue this week, with many US states reporting record high infection rates.
EM Preview for the Week Ahead
This is likely to be one of the most eventful weeks we’ve had in a while. Not only do three major central banks meet, but four EM central banks also meet, and we get important June and July data from the US, the first Q2 GDP reading from China, an OPEC+ meeting, and an EU summit.
EM Preview for the Week Ahead
EM FX was mixed last week, with most risk assets continuing to fight a tug of war between improving economic data and worsening virus numbers. Sentiment may be hurt early this week over lack of consensus in the EU and the US regarding further fiscal stimulus. Three of the four EM central banks meeting this week are expected to cut rates.
EM Preview for the Week Ahead
EM currencies took advantage of broad dollar weakness against the majors last week, with most gaining against the greenback. Yet the week ended on a bit of a risk-off note as concerns intensified about the resurgent virus and the impact on the still-weak global economy.
EM Preview for the Week Ahead
The dollar got some traction against the majors towards the end of last week. This weighed on EM FX, with the high best currencies TRY, BRL, CLP, and ZAR leading the losers. We downplay risk of contagion from Turkey, but we acknowledge it will keep investors wary of the countries with poor fundamentals.
Where Has All the Carry Gone?
Despite broad-based dollar weakness, EM currencies have not fully participated in the risk on environment that’s now in place. The good news is that fundamentals matter again. The bad news is that there are a lot of EM countries with bad fundamentals, and the secular decline in carry no longer gives these weaklings any cover.
EM Preview for the Week Ahead
EM performance this week will hinge crucially on whether US equity markets can find some traction. If sustained, last week’s equity rout could lead to a deeper generalized risk-off trading environment this week that would weigh on EM FX and equities.
EM Preview for the Week Ahead
Persistent risk-off impulses weighed on EM last week and that may continue this week. The Asian currencies outperformed last week while MXN, ZAR, and COP underperformed, and we expect these divergences to continue. Despite optimism about a stimulus package in the US, we think it remains a long shot. Meanwhile, virus numbers are rising in Europe and the US, with data from both regions likely to continue weakening.
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