EM Preview: The Crimean crisis threatens to escalate

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By Win Thin and Ilan Solot

The Crimean crisis threatens to escalate again this week. Russian forces in Crimea have been increased and they are consolidating their control of Crimea. This involves neutralizing Ukrainian bases in Crimea and getting control of communication and transportation, as well as securing borders. After the Crimean Parliament last week approved re-joining Russia, it will be presented as a referendum to the people of Crimea this weekend. The annexation of Crimea by Russia represents an important escalation of the crisis. The ruble and Russian stocks are likely to remain under pressure.

Hungary reports February CPI on Tuesday and is expected to rise 0.4% y/y vs. flat in January. It reports January trade on Wednesday. The central bank minutes showed a 7-2 vote to cut 15 bp to 2.7% at it last meeting, with the 2 dissents voting for no change. It also said that a more detailed interest rate outlook would be given after the CPI data. Next policy meeting is March 25, with consensus for 10 bp cut to 2.6%. For EUR/HUF, support seen near 310 and then 305, while resistance seen near 315 and then 320.

Israel reports February trade and Q4 current account on Tuesday. On Friday, it reports February CPI and is expected to ease to 1.3% y/y. Central bank minutes from the last meeting show a 4-1 vote for the surprise 25 bp cut that was due to lower than expected inflation (January CPI inflation 1.4% y/y). The one dissent was in favor of no move. We think the strong shekel will be a major factor going forward, as policymakers are likely unhappy with USD/ILS making new lows near 3.45. It’s worth noting that Israel policy rate troughed at 0.5% back in 2009, so there’s not much more room to go here at 0.75%. Support seen near 3.45 and then 3.40, while resistance seen near 3.50 and then 3.55.

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Brazil reports January IP on Tuesday and is expected at -3.4% y/y vs. -2.3% in December. It reports February IPCA inflation on Wednesday and is expected at 5.64% y/y vs. 5.59% in January. January retail sales come out Thursday, expected at 4.8% y/y vs. 4.0% in December. Inflation readings at the producer and wholesale level are starting to tick up, and so the central bank will have to remain vigilant at the consumer level. Indeed, we think there is potential for one last 25 bp hike at the April 2 meeting to 11%. Given the weak state of the economy, we do not think policymakers have an appetite for any more tightening, especially with the real remaining fairly firm. For USD/BRL, support seen near 2.30, while resistance seen near 2.35 and then 2.40.

Bank of Thailand meets Wednesday and is expected to cut rates 25 bp to 2.0%. February CPI came in a bit higher than expected at 1.96% y/y vs. 1.93% in January, while core ticked up to 1.2% y/y from 1% previously. However, the economy continues to suffer from the political paralysis as IP, exports, and private consumption are still contracting y/y in early 2014. Indeed, imports are contracting even faster than exports so the trade balance has improved. Further easing is justified this year. The last move was a 25 bp cut to 2.25% back in November. For USD/THB, support seen near 32.25 and then 32.00, while resistance seen near 32.50 and then 33.00.

South Africa reports Q4 current account on Wednesday and is expected at -5.4% of GDP vs. -6.8% in Q3. The trade deficit narrowed sharply in Q4, so there is risk of an even better current account reading. However, January trade deficit was reported at double the entire Q4 deficit, so the external accounts are likely to remain an issue in 2014. South Africa then reports January manufacturing production on Thursday, expected at 1.9% y/y vs. 2.5% in December. February PMI just popped back above 50 to 51.7, pointing to some potential manufacturing firmness ahead. Overall, though, we expect a continued mix of sluggish growth, elevated price pressures, and ongoing external deficits in 2014. If the rand remains relatively stable, we do not think that the SARB will be in any rush to hike again. For USD/ZAR, support seen near 10.60 and then 10.50, while resistance seen near 10.75 and then 11.00.

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Turkey reports January current account on Wednesday and is expected at -$5.3 bln vs. -$8.3 bln in December. The January trade deficit was smaller than expected and narrowed from December, so an improved current account seems likely too. Still, we do not think the external accounts have turned the corner yet, while inflation remains uncomfortably high. With political tensions likely to pick up ahead of local elections this month, we think there is scope for the lira to underperform over the near term. For USD/TRY, support seen near 2.20 while resistance seen near 2.25 and then 2.30.

India reports February IP and CPI on Wednesday. The former is seen at -1.0% y/y vs. -0.6% previously, while the latter is seen at 8.3% y/y vs. 8.8% previously. February WPI comes out on Friday and is expected at 4.9% y/y vs. 5.05% previously. Price pressures are easing, and should allow the RBI to remain on hold now. Like Bank Indonesia, RBI delivered some hawkish surprises in 2013, which allowed the currency to start outperforming after a period of underperformance. INR is the second best EM performer vs. USD, up 1.5% YTD. Growth is still an issue, however. Polls continue to suggest a BJP victory in May general elections, but we do not think this is bullish if it has to rule in a coalition, which appears likely for now. For USD/INR, support seen near 60 and then 59, while resistance seen near 62 and then 63.

Bank of Korea meets Thursday and is expected to keep rates steady at 2.5%. February CPI was slightly lower than expected, rising 1.0% y/y. Despite sluggish growth and low price pressures, the BOK has remained on hold since May 2013, when it last cut rates 25 bp. Korean exporters won’t be happy with recent moves in JPY/KRW, which has now headed back towards 10 after moving towards the 11 area in January. BOK is likely to intervene in USD/KRW to slow the move down. For USD/KRW, support seen near 1060 and then 1050, while resistance seen near 1080 and then 1090.

Bank Indonesia meets Thursday and is expected to keep rates steady at 7.5%. Price pressures continue to ease, as February CPI came in at 7.75% y/y vs. expected 7.94% y/y and 8.22% in January. Bank Indonesia may not have to hike any more, after it delivered several hawkish surprises last year and regained market confidence in the rupiah. Indeed, IDR is the top EM performer, up 7% YTD vs. USD. Last move was a 25 bp hike to 7.5% in November. USD/IDR broke below support near 11500. 11345 is the 62% retracement objective of the October-December rise, and break would target the October low near 10765. Support seen near 11000, while resistance seen near 11750 and then 12000.

China data deluge continues Thursday with February retail sales and IP. Over the weekend, February trade, new loans, and CPI/PPI were reported. The data played on fears that the yuan is overvalued and that the economic slowdown is getting more pronounced. Besides the slowdown in lending, the gap between new yuan loans and aggregate financing suggest a shadow banking squeeze is under way. USD/CNY continues to see outsized moves, with little predictability regarding direction and magnitude. We continue to believe this is what policymakers want to see, but in light of the weak data, there appears to be greater risk for further CNY weakness. Perhaps the level to watch in the dollar-yuan exchange rate is CNY6.15. This is level of the yuan that some highly leveraged financial products begin incurring losses, according to reports. Although the dollar has traded above there on an intra-day basis this year, it has not closed above it since last May.

Chile central bank meets Thursday and is expected to cut rates 25 bp to 4.0%. The central bank has highlighted potential for further easing given the slowing economy, and the data continue to slow. Copper fell nearly 4% on Friday and has dropped another 1% today, weighing on the peso and pushing USD/CLP to new highs for this move. There is a risk that the weak currency and higher inflation (February CPI rose a higher than expected 3.2% y/y) could keep the bank cautious now, waiting instead until next month to cut. Support seen near 560 and then 550, while resistance seen near 570 and then 600.

Peru central bank meets Thursday and is expected to keep rates steady at 4.0%. The economy is at risk of further slowing, but inflation remains a bit too high to ease just yet. CPI jumped 3.8% y/y in February, up from 3.1% in January and well above the 1-3% target range. However, we see a dovish bias developing as the year progresses. For USD/PEN, support seen near 2.80 while resistance seen near 2.83.

Czech Republic reports January IP, construction, and retail sales on Friday, as well as Q4 current account. Earlier today, February CPI came in steady at 0.2% y/y. Governor Singer said last week that the CZK floor could be extended as inflation remains subdued, which suggests the bank is in no hurry to remove stimulus despite some modest improvement in the economy. In the past, officials have said the floor would likely remain in place through 2014. Singer added that the bank would rather extend the duration of the floor in response to unfavorable developments, rather than change the level of the floor. For EUR/CZK, support seen near 27.30 and then at the 27.00 floor, while resistance seen near 27.50.

Poland reports February CPI on Friday and is expected to rise 0.8% y/y vs. 0.7% in January. After leaving rates steady last week at 2.5% (as expected), the central bank cut its CPI forecasts for 2014 and 2015 and, more importantly, said interest rates would stay unchanged until at least end-Q3. Before, many officials had seen steady rates until mid-year. We had always thought mid-year was too soon and continue to see rates steady until year-end, but let’s see how data come in. Polish officials have expressed concern about headwinds coming from the Ukrainian crisis, which seems likely to continue for some time yet. For EUR/PLN, support seen near 4.20 and then 4.18, while resistance seen near 4.2250 and then 4.25.

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