by EM FX took advantage once again of broad dollar weakness. Most EM currencies were up last week against the dollar, with the only exceptions being ARS, TRY, INR, THB, PEN, and MYR. We expect the dollar to remain under pressure this week and so EM should remain bid. However, the growing spread of the virus in Europe and the US supports our view that Asia is likely to continue outperforming. AMERICAS Chile held a referendum Sunday on whether to draft a new constitution. Voters also voted if those changes would be drafted by newly elected assembly by a combined one of new and existing lawmakers. As of this writing, results have not been reported. However, polls suggest Chileans favor replacing the Pinochet-era constitution, which would most likely lead to several
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EM FX took advantage once again of broad dollar weakness. Most EM currencies were up last week against the dollar, with the only exceptions being ARS, TRY, INR, THB, PEN, and MYR. We expect the dollar to remain under pressure this week and so EM should remain bid. However, the growing spread of the virus in Europe and the US supports our view that Asia is likely to continue outperforming.
AMERICAS
Chile held a referendum Sunday on whether to draft a new constitution. Voters also voted if those changes would be drafted by newly elected assembly by a combined one of new and existing lawmakers. As of this writing, results have not been reported. However, polls suggest Chileans favor replacing the Pinochet-era constitution, which would most likely lead to several years of talks and uncertainty before it is promulgated. Central bank minutes will be released Friday. September unemployment, retail sales, and IP will also be reported Friday.
Mexico reports September trade data Tuesday. A surplus of $3.5 bln is expected vs. $6.1 bln in August. Q3 GDP will be reported Friday. It is expected to rise 11.9% q/q vs. -17.1% in Q2, with the y/y rate improving to -8.8% from -18.7% in Q2. Despite the weak economy, inflation accelerated to 4.09% y/y in mid-October, the highest since May 2019 and further above the 2-4% target range. Next Banco de Mexico policy meeting is November 12 and it will be a close call. We lean towards a 25 bp cut to 4.0% but it may pause and wait until the December 17 meeting to cut.
Brazil central bank meets Wednesday and is expected to keep rates steady at 2.0%. Mid-October IPCA inflation just came in at 3.52% y/y, the highest since mid-March but still in the bottom half of the 2.5-5.5% target range. Despite the bank’s dovish forward guidance, the CDI market is pricing in a hike at the December 9 meeting followed by more hikes in 2021. Central government budget data will be reported Thursday, with a primary deficit of -BRL79.7 bln expected. Consolidated budget data will be reported Friday, with a primary deficit of -BRL92.2 bln expected.
Colombia central bank meets Friday and is expected to keep rates steady at 1.75%. However, a handful of analysts look for another 25 bp cut to 1.50%. At its last policy meeting September 25, the bank cut rates 25 bp to 1.75% and said future decisions would be data dependent. CPI rose 1.97% y/y in September, below the 2-4% target range for the third straight month. The data continue to come in weak and lower oil prices will add to the headwinds. As such, we see risks of a dovish surprise this week.
EUROPE/MIDDLE EAST/AFRICA
Turkey central bank releases its quarterly inflation report Wednesday. Last week, the bank hiked the Late Liquidity Window rate 150 bp to 14.75% but left the one-week repo rate unchanged at 10.25%. The hike in the LLW rate will allow for more backdoor tightening but the bank is really telling markets that it’s only reluctantly hiking. The weighted average cost of funding rose to 12.88% Friday as the bank struggles to limit lira losses. Next policy meeting is November 19 and an outright hike may be needed if the lira continues to weaken. September trade data will be reported Friday, with a deficit of -$4.9 bln expected vs. -$6.28 bln in August.
South Africa reports September CPI Wednesday. Headline inflation is expected at 3.0% y/y vs. 3.1% in August. If so, it would be the lowest since June and right at the bottom of the 3-6% target range. Next SARB policy meeting is November 19. While it has signaled steady rates ahead, we see risks of a dovish surprise then if the rand remains firm. September money and private sector credit data will be reported Thursday and both are expected to accelerate modestly from August. Trade and budget data will be reported Friday.
Poland reports October CPI Friday. Inflation is expected to remain steady at 3.2% y/y. Next central bank policy meeting is November 4. For now, the central bank has signaled steady rates. However, the economic outlook has darkened with the spreading outbreak of the virus. The second wave has forced authorities to tighten restrictions. Of note, President Dude has tested positive, joining Deputy Prime Minister Kaczynski as senior officials being infected.
ASIA
China’s leadership meets in Beijing this week to formulate the 14th five-year plan that runs from 2021 through 2025. The final plan won’t be made public before being formally approved by the National People’s Congress in March. However, some details are likely to emerge in official state media before that. Observers expect President Xi to stress rebalancing of the economy away from exports and towards domestic consumption. China reports official October PMI readings Saturday local time. Manufacturing PMI is expected to remain steady at 51.5 while non-manufacturing is expected to rise a couple of ticks to 56.1. The mainland economy continues to power ahead, helping to boost regional trade and activity.
Korea reports Q3 GDP Tuesday. It is expected to rise 1.3% q/q vs. -3.2% in Q2, with the y/y rate improving to -1.9% from -2.7% in Q2. September IP will be reported Friday. It is expected to rise 3.9% m/m vs. -0.7% in August, with the y/y rate rising to 1.5% from -3.0% in August. October trade data will be reported Sunday local time. Exports are expected to contract -5.9% y/y vs. +7.6% in September, while imports are expected to contract -2.2% y/y vs. +1.6% in September. However, there are distortions due to fewer working days this year compared to last year. Next BOK policy meeting is November 26.
Hong Kong reports September trade Tuesday. Exports are expected to contract -0.4% y/y vs. -2.3% in August, while imports are expected to contract -1.7% y/y vs. -5.7% in August. Q3 GDP will be reported Friday. It is expected to rise 0.5% q/q vs. -0.1% in Q2, with the y/y rate improving to -5.9% from -9.0% in Q2. Investment inflows into the mainland via Hong Kong continue to keep USD/HKD pinned to the strong end of the 7.75-7.85 trading band. The HKMA continues to buy USD and can do this indefinitely with an endless supply of HKD. We see no change to the peg for the foreseeable future.
Taiwan reports Q3 GDP Friday. It is expected to grow 0.8% y/y vs. -0.58% in Q2. Taiwan continues to benefit from the recovery in mainland China. Lawmakers just approved a supplemental budget to fund virus relief measures. For now, any stimulus is likely to come form the fiscal side as the central bank is seen remaining on hold into 2021. Tensions with China are likely to rise in light of protests held in Taipei in support of arrested Hong Kong anti-government protestors. Protests were held in many cities around the world, but Taiwan is in a particularly sensitive position.
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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
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.
EM Preview for the Week Ahead
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.
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