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A broader bearish bias set to remain on the local unit

March 9, 2021by Nicholas Kabaso
  • With the talks been the IMF and Zambia set to continue, the Economics Association has of Zambia has noted that the discussions are signalling hope for a possible deal, which remains critical to Zambia’s economic recovery plans. Meanwhile, Zambia’s Private Sector Alliance Chairperson Chabuka Kawesha has stated that regular updates from the Ministry of Finance regarding the discussions are helping to create some certainty in the market.  With the Washington-based lender stating that talks are set to continue, optimism on the possibility of a deal is likely to remain. However, given Zambia’s track record with IMF when it comes to negotiations, the progress might be slow, and risks exist a deal is unlikely be-fore the general elections.
  • Shifting to the base metals complex, A firmer USD has pressured copper prices this morning in Asia after the red metal managed to cement some 1.15% worth of gains yesterday. The USD is trading at a near 3 ½ month high this morning driven by the thoughts of faster economic normalisation from the pandemic as the $1.9trn stimulus underpins the growth narrative. We would like to point out that this wall of money will be a threat to the value of the USD longer term with currency debasement very much a feature. 
  • However, it will certainly spur economic activity in the United State, which along with China are the two largest global consumers of copper. Given this backdrop we view any pull back in the copper price as temporary in nature and we still concur with the forecasts of $10000/tonne before the end of 2021.
  • On the international front, the House of Representatives will be taking up the Senate’s version of the Stimulus plan on Wed and is expected to pass it as they did the original version. That will simply pave the way for its implementation. The stocks markets have responded positively to the news and await the effects of the stimulus on earnings. Full implementation is therefore set to take place around mid-month after Presi-dent Biden has signed off which will just be a formality. The US business cycle is already showing signs of improvement. This latest stimulus package will turbo-charge growth through the remainder of the year. 
  • Slowly, the US is coming out of lockdown and the pace of vaccinations is rising impressively. It is emboldening calls for masks to be abandoned and for states to loosen the restrictions that have restricted economic activity. Although travel is still discouraged, all signs show that a pick-up in travel activity has begun and will likely extend through the remainder of the year. Fully vaccinated people will be granted greater freedom to gather indoors. This is just a sign of things to come and bodes well for Q2 GDP growth.
  • Shifting to the FX markets, The USD has continued to surge and the short squeeze is now becoming painful for many speculators that had banked on the USD coming under considerable pressure. After all, the fundamentals are very significantly tilted against the USD given the twin deficits and the massive amount of monetary stimulus. That may indeed still precipitate a weaker USD over time, but for now, the USD is capi-talising on the one-sided positioning across EMs and other DMs and in the near-term has the potential to extend a bit further.
  • Locally, the Kwacha is expected to remain on the back foot this week as Zambia’s debt challenges underpin negative sentiment, denting in-vestment inflows and the local unit’s performance.

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Nicholas Kabaso

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