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EM STRATEGY DAILY - 16 July 2018 Summary

Core Content

This document provides an overview of emerging market (EM) strategy and market outlook for the week of 16 July 2018, focusing on key economic data, currency positioning, and policy implications across various regions including Asia, CEEMEA, Latin America, and specific mentions of Brazil and South Africa.

Main Points

Asia

• China's 2Q18 GDP Growth: China's GDP growth slowed to 6.7% y/y, the lowest since 2016, in line with Bloomberg consensus.
• Currency Positioning: The market remains short Asian currencies, with a slight retracement in CNH positioning. Investors are relatively less pessimistic about Southeast Asian currencies (SGD, MYR, THB, IDR), except for PHP.
• INR Positioning: The positioning of the Indian Rupee (INR) has eased from its 2-year extreme due to lower oil prices.
• Conference Call: The China Strategy team will hold a conference call on cross-asset implications of a US-China trade war from 09:30 – 10:30 London time.

CEEMEA

• Turkey Downgrade: Turkey was downgraded to BB (negative outlook) by Fitch on 13 July. This follows previous downgrades by Moody's and S&P.
• FX Reaction: The FX reaction was moderate, likely due to the prior downgrades.
• Policy Outlook: The focus is now on policy signals under the new presidential system. There is a likelihood of further rate hikes to address the deteriorating inflation outlook.
• Rate Hike Expectations: A 75-100bp increase in the policy rate is expected, despite the cumulative 500bp hike since April-June 2018, which has brought the rate to 17.75%.
• Next Policy Meeting: The next monetary policy committee meeting is scheduled for 24 July.

Latin America (Latam)

• Argentina's Inflation: The June inflation report is expected to be in focus. We forecast monthly inflation at 3.5%, lifting the annual rate to 29.1%.
• Core CPI: The core CPI index is expected to accelerate to 4% m/m from 2.7% in May.

Brazil

• Real GDP Proxy for May: The real GDP proxy is expected to reflect the truck driver's strike, showing a monthly contraction of -4.0% m/m.
• Growth Forecast: We forecast 2.0% growth in 2018 (with downside bias) and 3.5% in 2019.

Colombia

• Consumer Confidence: Expected to continue recovery and remain in positive territory.
• Trade Balance: Estimated at USD 0.1bn, with exports growing 15% y/y.

Key Information

• Market Volatility: FX volatility in South Africa is expected to influence the Central Bank of South Africa (SARB) policy meeting on 19 July.
• CPI Expectations: June CPI in South Africa is expected to rise to 4.8% y/y from 4.4% in May, driven by higher fuel prices.
• Core CPI Revisions: Core CPI forecasts for 2018 and 2019 have been revised up by 0.1pp and 0.2pp, respectively.
• ZAR Vulnerability: The South African Rand (ZAR) is seen as vulnerable to capital flight due to weakening foreign direct investment inflows and high foreign positioning.
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Contacts

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