Emerging Markets Preview: Starting Week On A Softer Note

EM currencies are coming off of a soft week, and are starting off this week on a softer note as well. The best performers are IDR (+1% vs. USD over the past week), TRY (+1%), and ZAR (+1%). The worst were RUB (-1.4% vs. USD), BRL (-1.25%), THB (-1.2%), and MYR (-1%). EM equities were mostly weaker too, with Thailand (-5% over the past week), Peru (-3%), and Chile (-3%) faring the worst and Mexico (+2%) and Turkey (+2%) faring the best.

We think markets will come around to our view that the odds of Fed tapering in December are being overstated. However, markets seemed to take the FOMC minutes last week as being less dovish than expected, and this may be enough to keep EM trading softer near-term.

The Bank of Israel met yesterday and kept rates steady at 1.0%. Policymakers seem comfortable with the current monetary stance, especially as the shekel has weakened a bit recently and inflation has started to tick a little higher to 1.8% y/y in October. A firmer shekel would increase the odds of the next rate cut, but for now, we see steady policy. For USD/ILS, support seen near 3.55 and then 3.50, while resistance seen near 3.60 and then 3.65.

South Africa reports Q3 GDP today and is expected to remain steady at 2.0% y/y. On Friday, it reports October money and credit data, as well as budget and trade data later in the day. We expect the same fundamental mix to remain in play: sluggish growth, twin deficits, and still-high inflation. For USD/ZAR, support seen near 10.00 and then 9.75, while resistance seen near 10.25 and then 10.50.

Hungary's central bank meets today and is expected to cut rates 20 bp to 3.2%. With disinflation moving towards outright deflation, we think the bank will cut rates 20 bp at both the November and December meetings, with more easing likely in 2014. The bank has now cut 15 months in a row. For EUR/HUF, support seen near 295, while resistance seen near 300 and then 303.

The Bank of Thailand meets Wednesday and is expected to keep rates steady at 2.5%. On Friday, it reports October trade and current account data. The economy is tipping very close to outright deflation, and so we think BOT will have a growing bias to ease in the coming months. For USD/THB, support seen near 31.50 and then 31.00, while resistance seen near 32.00 and then 32.50.

Mexico reports October trade on Wednesday. Data for Q3 came in on largely on the soft side, so it will be important to see if this carries over into Q4. Exports rose 7% y/y in September, and have risen y/y for four straight months. For USD/MXN, support seen near 12.80 and then 12.60, while resistance seen near 13.20 and then 13.40-45.

Brazil's central bank meets Wednesday and is expected to hike rates 50 bp to 10%. Brazil reports October fiscal data on Friday, with the primary surplus expected at BRL10 bln after a -BRL9 bln deficit in September. Despite promises of fiscal tightening by the government, markets will remain skeptical until greater progress has been seen. For USD/BRL, support seen near 2.25 and then 2.20, while resistance seen near 2.30 and then 2.35.

Korea reports October current accounts on Thursday. It then reports October IP on Friday, expected at 0.5% y/y vs. -3.6% in September. The external accounts are in very good shape. Even though growth is sluggish, the BOK seems comfortable with current policy. If 2014 data remain weak, we think there will be a dovish bias developing. A stronger won may also push BOK into being more dovish. For USD/KRW, support seen near 1060 and then 1055, while resistance seen near 1080 and then 1100.

Turkey reports October trade on Friday, and is expected at -$7.2 bln vs. -$7.5 bln in September. If so, this would push the 12-month total up to -$97 bln from -$95.1 bln and would be highest since May 2012. We are happy that the central bank moved to a hawkish bias this month, as fundamentals remain weak. For USD/TRY, support seen near 2.00 and then 1.95, while resistance seen near 2.05 and then 2.10.

Colombia's central bank meets Friday and is expected to keep rates steady at 3.25%. However, the economy is softening and we think it will move to a dovish bias soon. IP, exports, and retail sales all weakened in Q3 while inflation at 1.8% y/y is below the bank’s 2-4% target range. For USD/COP, support seen near 1920 and then 1900, while resistance seen near 1940 and then 1960.