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.

Hungary is expected to keep rates unchanged at 7.00% as food prices were the main drivers of the CPI surprise.

Much-higher-than-expected retail sales numbers released Monday are unlikely to make a difference. The next move for Hungarian policymakers is likely lower, unless something goes wrong with International Monetary Fund talks and the forint comes under renewed depreciation pressure.

With all the good news priced in, we think the risks are skewed toward negative headlines with the IMF talks and renewed economic weakness. We see the risk of EUR/HUF breaking above the 300 level during the IMF negotiations, but expect it to stabilize around 295 by the middle of the year.

Thursday (South Africa and Czech Republic): The South African Reserve Bank should keep rates on hold at 5.50%. Inflation in February was welcome news, falling more than expected to 6.1% year over year from 6.3% in January.

Unfortunately, the best of the rand's performance is behind us, in our view, and with it the prospects of more positive inflation pass-through from imported items.

The central will probably be locked in to the uncomfortable position of holding rates unchanged for the foreseeable future as inflation remains too high for easing and growth too weak for tightening.

We see the risks for ZAR roughly balanced at this point. Positive market sentiment has pushed USD/ZAR back below the 200-day MA at 7.6355, opening the door for a test of the key 7.50 level.

The Czech central bank is widely expected to keep rates at 0.75%. Headline CPI has been trending higher, reaching a three-year high of 3.7% year over year in February, but it largely has been driven by VAT increases, which should be temporary.

In addition, core inflation remains more subdued at 2.5% year over year. Central bankers have sounded fairly neutral recently, with Governor Miroslav Singer saying last week that rates will be "rather stable" this year in the absence of "some big surprise."

We expect EUR/CZK to fall gradually over the next few months but remain near our mid-year target at 24.50.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.