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Brown Brothers Harriman: Emerging Markets Preview for the Week Ahead

EM FX ended the week on a mixed note. For whatever reason, the major currencies took the brunt of the dollar’s rebound, with every currency down on the week except for CAD (+0.1%). EM FX was mixed on the week, with TRY, RUB, and ZAR able to carve out gains even as ARS and CZK fell. China is closed all week and so we may not see any trade-related headlines. However, China reported softer than expected PMI readings over the weekend that should keep markets nervous.

Korea reports September trade Monday. Exports are expected to contract -5.5% y/y while imports are expected to rise 4.4% y/y. August IP will be reported Tuesday, which is expected to rise 1.3% y/y vs. 0.9% in July. Korea reports September CPI Friday, which is expected to rise 1.6% y/y vs. 1.4% in August. If so, inflation would remain below the 2% target range. Next policy meeting is October 18, no change is expected then.

Thailand reports September CPI Monday, which is expected to rise 1.23% y/y vs. 1.62% in August. If so, inflation would move closer to the bottom of the 1-4% target range. Bank of Thailand just left rates steady and seemed in no hurry to hike. Next policy meeting is November 14, no change is expected then.

Indonesia reports September CPI Monday, which is expected to rise 3.06% y/y vs. 3.20% in August. If so, inflation would move further into the bottom half of the 2.5-4.5% target range. Yet Bank Indonesia just hiked rates 25 bp to 5.75%, due largely to the slumping rupiah. Next policy meeting is October 23, and much will depend on how the rupiah is trading then.

Poland reports September CPI Monday, which is expected to rise 1.9% y/y vs. 2.0% in August. If so, inflation would remain in the bottom half of the 1.5-3.5% target range. National Bank of Poland then meets Wednesday and is expected to keep rates steady at 1.5%. We suspect another low inflation reading will give the bank cover to maintain its ultra-dovish forward guidance of no hikes until 2020.

Brazil reports August IP Tuesday, which is expected to rise 3.2% y/y vs. 4.0% in July. September IPCA inflation will be reported Friday, which is expected to rise 4.41% y/y vs. 4.19% in August. If so, it would remain in the bottom half of the 2.5-6.5% target range. However, wholesale price pressures have surged, pointing to higher consumer inflation ahead. COPOM tilted more hawkish after its last meeting, and so the tightening cycle may begin at the October 31 meeting.

Hungary reports August retail sales Wednesday, which are expected to rise 5.6% y/y vs. 5.3% in July. Central bank minutes will also be released that day. At that meeting, the bank laid out the process for ending unconventional easing. However, we think it remains in dovish mode. August IP will be reported Friday, which is expected to rise 3.8% y/y vs. 3.9% in July.

Turkey reports September CPI Wednesday, which is expected to rise 21.1% y/y vs. 17.9% in August. If so, inflation would move further above the 3-7% target range. With a policy rate of 24%, the real rate would barely be 2% and that’s too low. Next policy meeting is October 25, and no change seems likely then. However, much will depend on how the lira is trading then.

Banco de Mexico meets Thursday and is expected to keep rates steady at 7.75%. CPI rose 4.9% y/y in August, which is accelerating and well above the 2-4% target range. However, the peso remains relatively firm and so the bank can afford to take a “wait and see” approach.

The Philippines reports September CPI Friday, which is expected to rise 6.8% y/y vs. 6.4% in August. If so, inflation would move further above the 2-4% target range. The central bank just hiked rates 50 bp to 4.5%, but that will be all but wiped out by the spike in inflation. Next policy meeting is November15, and another 50 bp hike seems likely then.

Taiwan reports September CPI Friday, which is expected to rise 1.9% y/y vs. 1.5% in August. While the central bank does not have an explicit inflation target, low price pressures led it to keep rates steady last week. Next quarterly meeting is in December and we think steady policy then is likely.

Reserve Bank of India meets Friday and is expected to hike rates 25 bp to 6.75%. A handful of analysts see steady rates. CPI rose 3.7% y/y in August, which is in the bottom half of the 2-6% target range. However, the rupee remains under pressure and so we think the RBI will lend it more support with higher rates.

Colombia reports September CPI Friday, which is expected to rise 3.23% y/y vs. 3.10% in August. If so, inflation would remain in the upper half of the 2-4% target range. On Friday, the central bank left rates steady at 4.25%, as expected. However, it also announced the start of an FX buying program. Governor Echavarria said the program is not meant to target any particular FX level but added that he is very comfortable with the current rate around 3000.

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Win Thin is the Global Head of Emerging Markets Strategy and has over 25 years of investment experience. He has a broad international background with a special interest in developing markets. Prior to joining BBH in June 2007, he founded Mandalay Advisors, an independent research firm that provided sovereign emerging market analysis to institutional investors. Prior to that, Win was a vice president and international economist, covering major emerging markets in Asia and Latin America for Alliance Capital Management

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