(from my colleagues Dr. Win Thin and Ilan Solot)
Emerging market currencies are coming off of a strong week, and are starting off this week on a firmer note as well. The best performers over the past week are MXN (+2.5% vs. USD), BRL (+2.5%), ZAR (+2.5%), and PLN (+1% vs. EUR). The laggards were IDR (-0.6% vs. USD), ARS (-0.5%), PHP, and CNY (both flat). EM equities were also strong performers, with Brazil (+3.5% over the past week), China (+3%), and Turkey (+5%) faring the best.
We think markets are coming around to our view that the odds of Fed tapering in December were being overstated. While the Fed will eventually take that step, the rising odds that tapering is delayed until 2014 is giving EM assets a bit of traction.
This may be enough to keep EM trading firmer near-term. For now, we think there is scope for further EM gains in November and early December. As we move through December, we do think calendar concerns will play a bigger role. If the current EM rally gives global investors a stronger YTD performance, we think many will then book profits and move to the sidelines by mid-December. We think the market is still split between January and March 2014 start to tapering, and so the January 28/29 meeting offers some event risk. Our base case is for a start in March 2014, but of course that is data dependent.
Brazil reports mid-November IPCA inflation on Tuesday, and is expected to rise 5.9% y/y vs. 5.75% in mid-October.On Thursday, it reports October current account and is expected at -$6.8 bln vs. -$2.6 bln in September. Growing twin deficits are big concerns, and markets will be waiting for signs that fiscal tightening will be enacted. Otherwise, a downgrade next year seems likely. COPOM meets next week, and is widely expected to hike rates 50 bp to 10.0%, with more hikes possible in 2014. For USD/BRL, support seen near 2.25 while resistance seen near 2.35 and then 2.40.
Turkey central bank meets Tuesday and is expected to keep policy rates steady. Policy outlook will depend on how the lira is behaving. During last week’s weakness, the central bank tightened liquidity within its rates corridor, pushing average cost of funding for banks to 6.8% on Monday and Tuesday before lowering it a bit towards the end of the week. The ceiling corridor is currently 7.75%, so a protracted bout of lira weakness would most likely necessitate moving the ceiling higher. Unemployment unexpectedly rose to 9.8% in August, making the decision to tighten a bit tougher as the recovery is still in early stages. For USD/TRY, support seen near 2.00 while resistance seen near 2.05 and then 2.0850.
Chile central bank meets Tuesday and is expected to cut rates by 25 bp to 4.5%. It started the easing cycle in October with a 25 bp cut, the first move since January 2012. The latest central bank survey of market participants shows expectations that the policy rate will bottom at 4.25% in 2014, but we think there is risk of a lower rate. Presidential election will go to a second round December 15, with Bachelet widely expected to win then. USD/CLP attempted to break higher last week, moving above the August high near 520 before running out of steam near 524. This coincides with the 523 high from June 2012, and this are proved too strong to break as the pair has now moved back below 520. Support is seen near 515 and then 510.
On Wednesday, South Africa reports October CPI and is expected to rise 5.7% y/y vs. 6.0% in September. Then the South Africa Reserve Bank meets Thursday and is expected to keep policy rates steady. The central bank is likely to keep the policy rate at 5.0%, frozen by a combination of high inflation, a weak rand, sluggish growth, and high unemployment. Last week’s revisions to trade data helped underpin the rand, but SARB later said that the revisions would have less impact on its current account series as it already incorporated its own adjustments to trade that SARS has just started to make. For USD/ZAR, support seen near 10.00 while resistance seen near 10.50.
Mexico reports September INEGI retail sales on Wednesday and is expected at -2.5% y/y vs. -2.2% in August. ANTAD has already reported September sales at -3.2% y/y, so the risk is tilted towards a weaker INEGI number. Mexico will follow up with Q3 GDP on Thursday (expected to rise 1.0% vs. 1.5% y/y in Q2) and then mid-November CPI on Friday (headline expected to rise 3.39% y/y vs. 3.27% in mid-October, core expected at 2.45% vs. 2.46%). Some analysts are calling for Q3 to be the trough for the Mexican economy, but we are not so sure since momentum was slipping as Q3 ended and Q4 began. Even if it is the trough, we do not think the rebound will be very strong and so we see risks of more easing in 2014. No move is seen at the December 6 meeting. For USD/MXN, support seen near 12.80 while resistance seen near 13.00 and then 13.20.
HSBC China flash PMI for November will be reported Thursday and is expected at 50.8 vs. 50.9 final in October. October data came in pretty firm, but we don’t expect much improvement in Q4 given the global headwinds still in place. Longer-term developments are positive as reform details emerge. For one, China will ease its “one-child” policy as part of its reforms. We think this is long overdue, but the benefits will not be immediate. This should help improve china’s demographic trends years from now, which right now are quite negative for a country at its stage of economic development. The labor force has already started to shrink. More immediately, we could see more details about the SOE reforms which have captures a lot of markets imagination. We see USD/CNY trading sideways to lower for the time being.
Poland reports October IP on Thursday and is expected at 4.4% y/y vs. 6.2% in September. Q3 GDP growth was stronger than expected, so October data will be key in determining if momentum carries over into Q4. The central bank will also release minutes of its November 6 meeting on Thursday. Most central bankers seem comfortable with the notion of policy kept on hold until mid-2014, but Glapinski said last week rates likely on hold until end-2014. For EUR/PLN, support seen near 4.15 while resistance seen near 4.20 and then 4.25.
This piece is cross-posted from Marc to Market with permission.