Tariff-fied – initial readings across EMs
EHSAN KHOMAN
Head of Commodities, ESG and
Emerging Markets Research –
EMEA
DIFC Branch – Dubai
T:+971 (4)387 5033
E: ehsan.khoman@ae.mufg.jp
SOOJIN KIM
Research Analyst
DIFC Branch – Dubai
T: +44(4)387 5031
E: soojin.kim@ae.mufg.jp
LEE HARDMAN
Senior Currency Analyst
Global Markets Research
Global Markets Division for EMEA
T: +44(0)20 577 1968
E: lee.hardman@uk.mufg.jp
MUFG Bank, Ltd.
A member of MUFG, a global financial group
Macro focus
The benign global macro outlook – with solid growth, normalising inflation and the tailwind of gradually declining rates in the US and beyond – now looks to be disrupted by one of the well-flagged risks coming into 2025. Over the weekend, President Trump signed executive orders imposing a 25% tariff on imports from Mexico, a 25% tariff on imports from Canada apart from energy, which would face a 10% tariff, and a 10% tariff on imports from China. These tariffs would apply above and beyond existing tariffs – effective 4 February. From an EM perspective, we expect the EMBI Global Diversified (EMBIGD) index could knee-jerk wider by up to ~20bp early this week and we could see Mexico 5 year CDS spreads jump higher by ~30bp. The overall EM spread move would likely depend on the degree to which a threat of a prolonged trade war spurs a broader risk off move, a corresponding rally in US Treasuries and some market pricing that the sentiment channel could derail US exceptionalism and growth.
FX views
Of the three tariffed countries, Chinese FX reaction is likely to be the mildest given the starting point of considerable pessimism already built into China-linked asset prices. A ballpark 10% additional tariffs on USD/CNH has been touted in the market to be worth another ~1% from current levels that retest year-to-date highs ~7.37, with overshoots be heavily smoothed by the People’s Bank of China (PBoC). A breach of 7.40 looks a low probability but is on the cards through the rest of the week pending no de-escalation in the interim. Meanwhile, given the maximalist nature of the current tariffs and the scope for further increases given the strong possibility of retaliation, we would expect a move in USD/MXN towards 22 (~7% depreciation) near-term, reflecting the comparable underperformance of the MXN compared to the 2018-19 episode.
Week in review
Saudi Arabia’s Q4 GDP grew 4.4% y/y, the fastest since Q4 2022, driven by a 3.4% rise in oil GDP. The National Bank of Hungary (MNB) kept its policy rate at 6.50% in line with our (and consensus) expectations. The South African Reserve Bank (SARB) cut its policy repo rate by 25bps to 7.50% in line with our (and consensus) expectations. Finally, Q4 2024 GDP prints were released across Hungary, Poland and the Czech Republic.
Week ahead
In the week ahead, we will have rates meetings in Poland (MUFG and consensus: on hold at 5.75%) and Czech Republic (MUFG and consensus: -25bps to 3.75%). We will also have the inflation reading in Turkey for the month of January (MUFG: 41.0% y/y; consensus: 41.5% y/y).
Forecasts at a glance
The external backdrop for EM has shifted abruptly – the soft-landing pro-risk environment and pricing of non-recessionary Fed cuts has given way to concerns around tariff risks (and likely retaliatory action), higher-for-longer US rates and a strong US dollar. This sets the stage for a challenging EM backdrop in 2025. There are dimensions that could make Trump 2.0 less disruptive. Given the reduced direct trade exposure of the Chinese economy to the US and expectations that there will be a monetary and fiscal response by Chinese policymakers to offset the tariff growth shock, the economic and financial market disruptions will, on aggregate, be less severe than Trump 1.0.
Core indicators
The latest weekly IIF flow data signalled that EM securities witnessed outflows of USD2.7bn in the week ending 31 January. The breakdown suggests that equities drove the outflows (USD3.1bn), while debt market saw a modest inflows (USD0.4bn).
