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Emerging-Market Central Banks: Steady Rates

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Ilan Solot

NEW YORK ( BBH FX Strategy) -- Don't expect much excitement from this week's emerging-market central bank meetings, as they all should result in rates being held steady.

The greatest chance of a surprise will be in Turkey, where the authorities may make changes to the lending corridor toward looser policy, though we very much doubt that will happen.

Monday (Israel): The central bank of Israel holds its policy meeting and is expected to keep rates steady at 2.5%. February CPI came in as expected at 1.7% vs. 2.0% year over year in January.

The central bank has been on hold since its surprise 25-basis-point cut to 2.5% back in January, but easing price pressures should give it room to cut.

On the other hand, 12-month inflation expectations rose to 2.6% in March from 2.4% in February, so risks of a dovish surprise are low.

The shekel has lagged most other Europe, Middle East and Africa currencies since the start of the year, but has proven more resilient against the dollar over the bout of risk aversion last week.

Encouragingly, the shekel is the top regional currency this month as USD/ILS kept under the 50-day MA, gradually moving towards the next resistance level at 3.7. After that, we target the 200-day moving average around 3.67 but acknowledge that tensions with Iran will play a major, yet unpredictable, risk for the shekel.

Tuesday (Turkey and Hungary): The Turkish central should keep all rates unchanged, refraining from narrowing the corridor.

We expect officials to continue micromanaging domestic liquidity between the "normal days" when borrowing occurs at 5.75% and "exceptional days" when its rates effectively rise to around 11.00%.

Governor Erdem Basci backtracked on recent dovish comments and has recently adopted a more hawkish tone in light of stubbornly elevated inflation (10.50% year over year in February) and the 3.5% depreciation of the Turkish lira since the start of the month.

We think short-term positive momentum for TRY could continue, but we still expect USD/TRY to end the second quarter around the 1.80 level.
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