EM FX ended last week on a firm note despite the strong US jobs data, with the dollar succumbing to some “buy the rumor, sell the fact” price action. We think the dollar should recover as the week begins, as it seems risky to be short/underweight dollars going into the FOMC meeting. With the Fed poised to hike 3 or perhaps 4 times this year, we don’t think EM FX can continue to rally the way it has so far this year. Friday’s price action may be more about positioning than the fundamentals.
Turkey reports January current account Monday, which is expected at -$2.8 bln vs. -$4.3 bln in December. The central Bank meets Thursday and is expected to tighten policy with a 50 bp hike in the late liquidity window rate to 11.50%. Lately, the central bank has tightened by forcing banks to borrow at this window rather than at the overnight rate of 9.25%. We still think reliance on back door tightening reflects Erdogan’s heavy-handed tactics to prevent outright rate hikes.
China reports January-February retail sales and IP Tuesday. Because of Lunar New Year distortions, China bundles January and February together for these series. Retail sales are expected to rise 10.6% y/y while IP is expected to rise 6.2% y/y. For now, global markets appear to be very comfortable with the Chinese macro story.
India reports February WPI and CPI Tuesday. The former is expected to rise 6.10% y/y vs. 5.25% in January, while the latter is expected to rise 3.60% y/y vs. 3.17% in January. The economy appears to be recovering nicely from the shock November demonetization, while price pressures are picking up. As such, we think the RBI was right to signal the end of the easing cycle.
South Africa reports January manufacturing production Tuesday, which is expected to rise 1.6% y/y vs. -2.0% in December. It then reports January retail sales Wednesday, which are expected to rise 1.1% y/y vs. 0.9% in December. The economy remains sluggish, but elevated inflation is preventing the central bank from cutting rates. Next SARB meeting is March 30, and rates are likely to be kept steady at 7.0%.
