Emerging Markets: Preview

(from my colleague Dr. Win Thin)  

EM was mostly softer last week, with INR, IDR, MYR, and BRL underperforming against USD. ZAR, PEN, and THB stood out by being amongst the few to gain against the dollar last week.

Today, EM is starting the week off firmer but we think traction will be hard to sustain as the FOMC meeting approaches. If there is no tapering Wednesday, as we expect, there is some scope for the EM bounce to continue. However, we believe year-end considerations as well as the prospects for likely tapering in January or March should keep a lid on any near-term EM rally.
Mexico reports retail sales this week. November ANTAD sales come out Monday, expected to rise 1.1% y/y after falling -2.1% y/y in October. On Thursday, October INEGI sales come out and are expected at -2% y/y vs. -4% in September. Lastly, Banco de Mexico releases minutes from its December meeting on Friday. After the decision to keep rates steady this month, the bank’s statement was fairly upbeat on the economic outlook. Minutes should reflect this, and will likely support the bank’s view that rates have bottomed. For USD/MXN, support seen near 12.80 while resistance seen near 13.00, 13.10, and 13.30.
Singapore reports November trade data on Tuesday. NODX expected to rise 4.3% y/y vs. 2.8% in October. Real sector data has been mixed recently. October retail sales were much weaker than expected, -7.5% y/y and contracting for the fifth straight month and for twelve of the past thirteen. On the other hand, IP is starting to accelerate and this should help boost exports, which have remained fairly weak. Inflation is creeping higher, and so the MAS will likely feel justified in keeping policy steady this October. However, it may come at a price of slower growth in 2014. For USD/SGD, support seen near 1.2550 and then 1.2500, while resistance seen near 1.2600 and then 1.2700.
On Tuesday, the Czech central bank meets and is expected to keep policy steady. It was only at the last meeting in November that the central bank started its CZK intervention program, and so there is no need to change policy yet. We do think some would like to move the 27.00 floor for EUR/CZK higher, but it is way too early for such a move. Some of the economic data are showing signs of modest improvement, but the central bank sees the current accommodative policies continuing into 2015. Support for EUR/CZK now seen near 27.50, resistance seen near 28.00.
On Tuesday, the Turkish central bank meets and is expected to keep policy steady. After a spike early last week, the weighted average cost of funding has fallen back to near 6.5%, which is the rate the central bank feels is consistent with the overnight lending rate of 7.75%. With the lira showing signs of stability, we see no need for the central bank to move any of its policy rates now. Still, the economic fundamentals are fairly weak and so we expect the lira to remain under pressure in the next bout of EM selling. For USD/TRY, resistance seen near 2.05 and then 2.0850, while resistance seen near 2.00.
On Tuesday, the Hungarian central bank meets and is expected to cut rates 20 bp to 3.0%. Minutes from the November meeting suggest there is more room to cut rates. We think more cuts in 2014 are likely as well, but let’s see what the bank signals after this December cut. Disinflation continues, with CPI rising only 0.9% y/y in November, well below the 2-4% target ranged. Forint weakness is unlikely to derail the easing cycle. The Supreme Court ruled today that foreign currency loans are valid contracts, and that the borrowers will have to shoulder the burden of any harmful FX movements. Prime Minister Orban wants the banks to take most of the hit, so financial stocks are rallying sharply today along with the forint. For EUR/HUF, support seen near 298 and then 296, while resistance seen near 304.
On Wednesday, the Reserve bank of India meets and is expected to hike policy rates by 25 bp. Last week, consensus was for no change but November CPI came in much higher than expected. WPI came out earlier today at 7.5% y/y vs. 7.0% consensus. There were clearly upside risks as CPI was much higher than expected, up 11.2% y/y vs. 10% consensus and 10.1% in October. For USD/INR, support seen near 61.00, while resistance seen near 63.00 and then 64.00.
Poland reports November IP and PPI on Wednesday. IP is seen slowing to 1.7% y/y from 4.4% in October, while PPI is seen contracting -1.1% y/y vs. -1.3% in October. The central bank will release minutes of its December policy meeting, when it kept rates steady at 2.5%. Bank officials have signaled no more rate cuts, but we think that the combination of slow growth and continued disinflation (CPI inflation slowed to 0.6% y/y in November) will likely lead to a growing dovish bias in 2014. We do not see rate hikes by mid-year, as many at the central bank believe. For EUR/PLN, support seen near 4.17 and then 4.15, while resistance seen near 4.20 and then 4.22.
On Thursday, Brazil reports mid-December IPCA inflation and is expected to rise 5.74% y/y vs. 5.79% in mid-November. Also on Thursday, Brazil reports November current account and FDI data. BCB may also release its quarterly inflation report sometime this week, and should provide a roadmap for policy in 2014. With price pressures showing signs of easing, we think the end of the tightening cycle is near. We see a 25 bp hike in January that takes the rate to 10.25%, but acknowledge risk of a 50 bp hike since the language in November suggested no change to the current pace of hikes. For USD/BRL, support seen near 2.30 and resistance seen near 2.40.
On Friday, the Colombian central bank meets and is expected to keep policy steady at 3.25%. Minutes from the November meeting came out last Friday, which showed that some members of the board saw scope for further easing. Rates have been on hold since March. On Thursday, Colombia reports Q3 GDP growth and is expected to remain steady at 4.2% y/y. We think there is downside risks, as IP, retail sales, and exports all grew slower in Q3 than they did in Q2. That same day, it also reports October retail sales and IP. The economy is showing signs of softness still, with IP, retail sales, and exports all largely stagnant. As such, we think there is a risk that the easing cycle will restart in 2014 if the slowdown continues. Inflation of 2% is right at the bottom of the 2-4% target range. For USD/COP, support seen near 1920 and then 1900, while resistance seen near 1940, 1950, and 1960.

This piece is cross-posted from Marc to Market with permission.