We believe the events of last week continue to provide a supportive backdrop for EM assets. Not only did the ECB provide more stimulus (and leave open the door for QE), but the US economy delivered another 216k jobs in May. This fits in with our view that we are still in the midst of an EM “sweet spot.” All in all, we expect the recent rallying trend in EM assets to continue, thought the recent recovery in the US Treasury yields may leave fixed income investors a bit hesitant.
The week ahead is likely to be a quiet one for EM asset prices as the focus shifts to the World Cup. Still, central banks continue to occupy the center stage after Mexico’s surprise cut and Brazil’s extension of its FX intervention program last week. Many are looking for the Korean central bank to step up its FX interventions as USD/KRW breaks below the key 1020 level. As always, USD/JPY is a factor to watch for Korea (via JPY/KRW), especially if breaks out of recent ranges to the upside.
China data deluge started over the weekend with trade, and continues this week with CPI and PPI on Tuesday. CPI is seen rising 2.4% y/y vs. 1.8% in April, while PPI is seen at -1.5% y/y vs. -2.0% in April. New loan and money data is due out sometime this week, but no data has been given yet. On Friday, China reports retail sales and IP, expected at 12.1% y/y and 8.8% y/y, respectively.
Turkey reports Q1 GDP Tuesday, with growth expected to slow to 4.2% y/y from 4.4% in Q4. It then reports April current account data, expected at -$4.9 bln vs. -$3.2 bln in March. The April trade gap was slightly worse than expected, and so see similar risk for current account. Still, the 12-month totals for both series continue to improve. The inflation trajectory is worrisome, however. For USD/TRY, support seen near 2.05 and then 2.00, resistance near 2.10 and then 2.15.
South Africa reports April manufacturing production Tuesday, expected at -3.9% y/y vs. +0.7% in March. SARB has continued to highlight weakness in the economy, which should preclude any near-term rate hikes. For USD/ZAR, support seen near 10.60 and then 10.40, resistance near 10.80 and then 11.00.
Mexico reports May ANTAD retail sales Tuesday, expected to rise 3.0% y/y vs. 2.4% in April. April IP will be reported Wednesday, expected at -0.2% y/y vs. +3.4$ in March. Overall, data are likely to show continued weakness after Banco de Mexico surprised markets with a 50 bp cut to 3.0%. It said further rate cuts are not recommended but that's pretty much what they said after the March 2013 cut and then after the October 2013 cut. For USD/MXN, support seen near 12.80, resistance near 13.00 and then 13.20.
On Wednesday, MSCI will announce decisions on several Asian share markets in its annual Market Classification Review. MSCI is considering including China A shares in its MSCI EM index. MSCI is also reviewing South Korea and Taiwan for potential upgrades from EM to DM.
Hungary reports May CPI Wednesday, expected to remain steady at -0.1% y/y. The central bank releases its minutes later that day. At that May 27 meeting, it cut rates by 10 bp to 2.40%, as expected. Minutes should provide some clues, but with deflation risks continuing, another 10 bp cut to 2.30% is expected at the next meeting June 24. For EUR/HUF, support seen near 302 and then 300, resistance seen near 305 and then 310.
Bank of Korea meets Thursday and is expected to keep rates steady at 2.5%. Inflation remains below target and so for now, it’s steady as she goes. Further won strength is not desirable, and we should see increased intervention on break of USD/KRW below 1020. Support seen near 1000, resistance now near 1020 and then 1040.
Bank Indonesia meets Thursday and is expected to keep rates steady at 7.5%. CPI ticked higher in May and while recent rupiah weakness is worrisome, we do not think this is not enough to get BI to tighten yet. For USD/IDR, support seen near11750 and then 11500, resistance near 12000 and then 12300.
India reports May CPI and April IP on Thursday. Price pressures should continue to ease, with CPI seen up 8.4% y/y vs. 8.6% in April. RBI highlighted the potential for easing if the inflation outlook continues to improve. We think H2 could see the start of the easing cycle. For USD/INR, support seen near 59.00 and then 58.00, resistance near 59.50 and then 60.00.
Brazil reports April retail sales Thursday, seen up 6.1% y/y vs. -1.1% in March. IPCA inflation rose more than expected in May, up 6.37% y/y and the high for this cycle. BCB is sticking with the story that full effects of past rate cuts have yet to be felt, especially as the economy remains weak. Another poll late last week showing further decline in Dilma's support (from 37% to 34%) is also helping to support the real. For USD/BRL, support seen near 2.20, resistance seen near 2.30.
Chile central bank meets Thursday and is expected to keep rates steady at 4.0%. May CPI came in higher than expected at 4.7% y/y, putting it further above the 2-4% target range. However, the central bank remains in dovish mode given how weak the real sector data have been. We see easing cycle resuming in H2, but not until the inflation trajectory has improved. For USD/CLP, support seen near 550 and then 540, resistance seen near 560 and then 570.
Peru central bank meets Thursday and is expected to keep rates steady at 4.0%. CPI rose 3.6% y/y in May, putting it further above the 1-3% target range. The economy is showing some resilience, but is nevertheless showing signs of slowing. The next move is likely to be a rate cut, but not until the inflation trajectory improves. For USD/PEN, support seen near 2.78 and then 2.76, resistance seen near 2.80 and then 2.82.
Poland reports May CPI Friday, expected to rise 0.5% y/y vs. 0.3% in April. Despite a slight upward tick in inflation, the central bank remains concerned about growth, as evidenced by Governor Belka’s surprise admission last week that a rate cut can’t be completely dismissed. For now, real sector data remains firm enough to keep rates steady in to 2015. We think it would take a significant deterioration to see a rate cut. For EUR/PLN, support seen near 4.10 and then 4.05, resistance seen near 4.15.
(from my colleagues Dr. Win Thin and Ilan Solot)