(from my colleague Ilan Solot)
With the all the euphoria about the Chinese currency depreciation apparently behind us, we can again focus on other drivers for EM assets. And these are developments in G10, commodity prices and idiosyncratic factors. We don’t expect any barriers for Greece to finalize its bailout, with the German parliament likely to endorse the agreement soon. Markets will continue to debate the timing for the Fed hike, with a September move likely the more negative outcome for EM.
Separately, lower oil prices continue to weigh on energy produces, but also contributing to negative sentiment more broadly in EM. Lastly, idiosyncratic factors in EM, especially political ones, will be watched closely, especially in Turkey, Malaysia and Brazil. All in all, it’s an unfavourable outlook, but disastrous.
The Turkish central bank meets on Thursday and while most expect no change in the policy rate, there has been some recent speculation that they may do something to contain the falling lira. Turkey’s benchmark main policy rate is 7.50% and despite the government’s pressure for further cuts, high inflation (just under 7%) and the risk of pass-through will keep policymakers at bay. One possibility is that the bank begins its process of simplification of monetary policy tools, with a narrowing of the corridor.
The central bank of Indonesia also meets on Thursday and is expected to leave rates unchanged. The reference rate is set at 7.5% since its one off rate cut in February. This should be an uneventful decision. The Indonesia economy is lukewarm with growth at 4.6% and CPI still elevated at 7.26% y/y. The central bank has shown no intentions to use its policy rates to contain the weakening rupiah.
Chile published its Q2 GDP figures on Tuesday and is expected to show a small q/q contraction of -0.2%. This would be the first negative quarterly print since Q2 2014. The y/y rate is expected to fall to 1.7% from 2.4%, justifying the central bank’s dovish stand.
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