We think the EM selloff last week was corrective in nature, not a reversal. With some exceptions, of course, EM as an asset class remains in a sweet spot: cheaper valuations, many countries reaching the end of their tightening cycles, currencies more stable or appreciating, lower bond yields in developing countries, all together will a continued recovery in US growth.
EM ended last week on a firm note, due to both fundamental and technical developments. There were several positive EM ratings actions by S&P late last week, for Romania, Bolivia, and Egypt.
On the technical side, several EM currencies saw their 200-day MAs in play this last couple of days, which is a bit unusual. USD/ZAR has tested its 200-day MA around 10.42 for three straight days but has since fallen back. USD/TRY is flirting with its 200-day MA near 2.0970 but has been unable so far to make a clean break above it. EUR/PLN has tested its 200-day MA around 4.1930 for three straight days too but has been unable to make a clean break above. USD/IDR broke below its 200-day MA Thursday near 11500, and has since made a clean break below.
Taiwan reports April export orders on Tuesday, expected to rise 5.7% y/y vs. 5.9% in March. It then reports April IP on Friday, expected to rise 3.6% y/y vs. 3.1% in March. Economic data have been improving in recent months, with GDP growing 3% y/y in both Q4 2013 and Q1 2014, the fastest rate since Q4 2012. Yet price pressures remain low, and so we see the central bank on hold for this year at 1.875%. For USD/TWD, support seen near 30.00 and then 29.80, resistance seen near 30.20 and then 30.40.
Poland reports April IP on Tuesday, expected to rise 5.1% y/y vs. 5.4% in March. March data have come in a touch softer, and it will be important to see if the weakness carries over into Q2. The central bank releases its minutes on Thursday. We would expect them to underscore risks that forward guidance may be pushed out further, as some officials have suggested. Indeed, since that May 6 policy meeting, April CPI was reported at 0.3% y/y vs. 0.7% consensus. For EUR/PLN, support seen near 4.18 and then 4.16, resistance seen near 4.20 and the 4.22.
South Africa reports April CPI on Wednesday, expected to remain steady at 6.0% y/y. The South African Reserve Bank then meets Thursday and is expected to keep rates steady at 5.5%. Since the last SARB meeting March 27, the real sector data (manufacturing, retail sales, etc.) have been coming in weaker than expected. As such, we do not expect a rate hike this month in response to higher than targeted inflation. For USD/ZAR, support seen near 10.25 and then 10.00, resistance seen near 10.50 and then 10.75.
Brazil reports mid-May IPCA inflation on Wednesday, expected to rise 6.29% y/y vs. 6.19% in mid-April. It then reports April current account data on Friday, expected at -$6.5 bln vs.-$6.25 bln in March. If so, the 12-month total would fall for the second straight and move below -$80 bln for the first time since July 2013. FDI remains strong, and so we do not think the external accounts will be an issue this year. Rather, we believe inflation will be the key variable for Brazil ahead of the elections. For USD/BRL, support seen near 2.20, resistance seen near 2.25.
Mexico reports INEGI March retail sales on Wednesday, expected at -1.1% y/y vs. -1.7% in February. ANTAD has already reported March sales at -2.4% y/y, and so a weaker than expected number is possible. However, ANTAD reported a rebound to +2.4% y/y in April. Mexico then reports mid-May CPI inflation on Thursday. Headline expected at 3.43% y/y vs. 3.52% in mid-April, while core expected at 3.01% y/y vs. 3.16% in mid-April. Mexico then reports Q1 GDP on Friday, expected to rise 2.1% y/y vs. 0.7% in Q4, as well as Q1 current account. For USD/MXN, support seen near 12.90 and then 12.80, resistance seen near 13.00 and then 13.20.
HSBC reports China flash PMI for manufacturing Thursday, expected at 48.3 vs. 48.1 final reading in April. This will be the first reading for May, and comes after generally softer than expected April data. We note that the official PMI has remained above 50 even though the HSBC reading has been below the 50 boom/bust level for four straight months. We see USD/CNY continuing to drift upwards in the 6.206.30 range.
Turkey central bank meets Thursday and is expected to keep rates steady at 10%. Inflation remains too high for the central bank to cut rates anytime soon, as headline CPI rose 9.38% y/y (core rose 9.74%) in April. PPI also continues to accelerate, pointing to pipeline price pressures ahead. It remains to be seen how much political fallout there will be for Erdogan from the mining disaster. For USD/TRY, support seen near 2.05 and then 2.00, resistance seen near 2.10 and then 2.15.
Ukraine presidential election will be held on Sunday. That will likely begin a new phase in the crisis. Polls suggest businessman Petro Poroshenko, the so-called Chocolate King, is poised to win handily. He has strong business ties with Russia, suggesting he will provide an opportunity for better relations between the two countries. Elsewhere, reports suggest that non-uniformed combatants (Blackwater) may be confronting non-uniformed Russian allied combatants in east Ukraine, and may mark a new phase. It also appears that the limited sanction regime is having a somewhat greater cooling off effect on Russia's financial and trade ties than it may have initially appeared.
Colombia also holds the presidential election on Sunday. Polls show incumbent Santos in a statistical tie with opposition candidate Zuluaga. If neither wins 50% of the vote, as polls suggest, they would go to a second round June 15. Santos co-founded the Social Party of National Unity but was Defense Minister under former President Uribe and his Colombia First party. Zuluaga is currently backed by Uribe and his newly formed Democratic Center movement. Either way, we see little deviation from current economic policies. For USD/COP, support seen near 1900, resistance seen near 1950 and then 2000.
(from my colleagues Dr. Win Thin and Ilan Solot)