(from my colleagues Dr. Win Thin and Ilan Solot)
EM again starts off the week on the back foot, but losses are (for now) concentrated in the commodity currencies. With commodities (except for iron ore) already under pressure again, this trend looks set to continue. US jobs data Friday is likely to bring the focus back on Fed liftoff, which is of course EM-negative. MSCI EM has tried to get some traction, but the bounce was limited and it appears ready to test the cycle low from last week.
Brazil is especially under pressure, hitting levels not seen since 2003, pressured by the decision by the central bank to stay on the sidelines on FX and signaling the end of the tightening cycle. The ruble will also come in the spotlight due to the sharp fall in crude oil. The decision by the central bank to stop its dollar purchase program has been partially offset by its 50 bp rate cut last week. Lastly, investors should keep an eye on the volatile internal and geopolitical situation in Turkey as we believe that many of the risks have not yet been priced in.
Mexico reports July PMI Monday, with manufacturing expected at 52.8 vs. 53.1 in June. It then reports July CPI on Friday. It is expected to rise 2.75% y/y vs. 2.87% in June. Banco de Mexico kept rates steady last week and was dovish on the economy. It noted continued cyclical weakness in the economy, particularly in non-auto manufacturing mining, and building. Exports and investment have deteriorated compared to H2 2014, it added. Yet Governor Carstens resumed talking about a rate hike. We do not think he can follow through on this.
Brazil reports July trade Monday, with exports seen at -18.5% y/y and imports at -24% y/y. It then reports July FIPE inflation (seen 8.75% y/y) and June IP (seen -5.0% y/y) on Tuesday. COPOM minutes will be released along with June unemployment on Thursday. COPOM signaled that the tightening cycle has ended for now, but we suspect it may have to continue hiking. Brazil reports July IPCA inflation Friday, seen rising 9.52% y/y vs. 8.89% in June. Both IPCA and FIPE inflation are making new cycle highs, as are IGP-M and PPI wholesale inflation measures.
