(from my colleague Dr. Win Thin)

EM ended last week on a soft note, due to a variety of both external and internal factors.  Firm US data continue to support our call for resumed Fed tightening, and this gave the dollar a bit of a bid. With the dollar gaining against the majors, this spilled over into generalized dollar gains vs. EM as well.  Weak data out of China this week poses a risk to EM, though we suspect that how China markets react will set the tone for the wider EM.

Idiosyncratic EM risk remains in play too. The South African rand lost nearly 4% on Friday on heightened political risk, as reports suggest problems between Finance Minister Gordhan and President Zuma. Brazil’s central bank meets this week, and another dovish signal while inflation continues to accelerate will likely weigh on the real. Indeed, press is reporting that many in the PT are urging Rousseff to abandon austerity and to cut rates.    

South Africa reports January money and credit growth, trade, and budget data Monday. It then reports Q4 GDP Tuesday, which is expected to rise 0.5% y/y vs. 1.0% in Q3. The rand has yet to recover from press reports last week that Finance Minister Gordhan threatened to resign last week over clashes with South African Revenue Service Commissioner Tom Moyane.  Zuma expressed support for Gordhan, but other developments suggest otherwise. If Gordhan is forced out, investors would give up on any hope of orthodox policies from Zuma. Whatever happens, the nation’s reputation has been greatly damaged in recent weeks.

Thailand reports January trade and current account data Monday.  It then reports February CPI Tuesday, which is expected to remain steady at -0.5% y/y.  This is well below the 1-4% target range, and the BOT is starting to tilt more dovish as the BOT Governor said it is saving rate cuts for external shocks.  Given ongoing deflation, we think the odds favor rates cuts sometime this year.