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African FX volatility muted

January 20, 2022by Nicholas Kabaso
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Local Market Commentary

  • For the most part, African currencies have shown a degree of resilience at the start of the year. Regional volatility has been broadly stable, while in some instances, volatility for the likes of the South African Rand (ZAR)  and Zambian Kwacha (ZMW) has even moderated when looking at ETM’s 30-day realised volatility chart. Notably, the ZAR volatility has moderated from levels north of 17% in November to around to just south of 12% at present. Note, the ZAR has had a strong start to the year and is currently ranked the second-best performing African currency against the USD among those tracked by Bloomberg on a year-to-date basis. Much of the ZAR’s resilience has been attributed to the MTBPS, which revised down the depth of SA’s fiscal troubles, buoyant commodity prices that have bolstered SA’s trade and current accounts, SA’s mild 4th wave of the Omicron variant and the ZAR’s undervaluation.        
  • While the ZMW volatility has moderated, it is worth highlighting that it still remains the highest among the African countries under review. Meanwhile, in countries such as Egypt and Tanzania, volatility remains benign. Although volatility levels are somewhat muted, risks appear to be tilted to the upside in the near-term. While growth concerns have resurfaced, it is clear that major central banks, including the Federal Reserve and the Bank of England, are committed to tightening monetary policy. Although the global financial system is flush with cash at the moment, the tide has turned, and growth in global dollar liquidity has begun to decelerate as stimulus is gradually removed from the financial system.
  • The upswing in the dollar liquidity cycle has now peaked and global dollar liquidity has begun to moderate. As the supply of dollars to the global financial system slows, there is less hot money to be diverted to riskier emerging and frontier market assets, and they can experience volatility. In the African continent, countries without sound fundamentals are at risk of heightened volatility in the coming months.
  • Moving over to the U.S., today the focus will shift to a combination of weekly jobless claims, Philly Fed business confidence index, and Existing home sales. The data across all three should confirm a robust and improving economy, Omicron infections notwithstanding. The slightly lower mobility stats through the end of the year, due to Omicron, appear to have had a negligible overall impact on growth given how the private sector has learnt to mitigate such disruptions with working from home alternatives, online shopping and other forms of technology.
  • U.S. Senate Democrats failed to pass their voting rights bill on the political front. This ahead of the mid-term elections in November comes as a blow to the Biden administration. The Republicans used the filibuster to stop the legislation the first time. However, even when the rules were changed to allow for a simple majority, the Democrats themselves could not muster the required number of votes. The objective was to establish minimum federal voting standards so that any registered voter could request a mail-in ballot, something that would’ve worked in the Democrats’ favour.
  • For now, the USD rally has stalled, broadly in line with the behaviour of U.S. Treasuries and the inability for bond yields to rise even higher. The market looks fully priced, and even strong economic data now does not necessarily translate into a further sharp rise in U.S. Treasury yields. The yield curve flattening raises questions about the sustainability of U.S. growth and the ultimate implications of hiking too aggressively. One eye will turn to the data later today and to geopolitical developments in Ukraine that may lift broader support for the USD.

Rand and International FX Commentary

  • If there was any debate about whether the SARB should be hiking, yesterday’s inflation data put that to bed. With inflation surprising to the topside and almost at the top of the inflation target range, the SARB will be forced into hiking. In a world that rewards more conservative monetary policy, that is good news for SA’s ZAR, and the appreciative reaction that followed indicates that. Add to that a modest retreat on the USD, which gave up some ground and a third consecutive week of appreciation, especially if the pair can crack and sustain a break below the 15.3000 level.
  • Even though the main headline figure has been driven higher by factors outside SA’s control, the concern is that it will manifest in higher inflation expectations. The weakness of SA’s credit cycle will naturally limit the degree to which inflation can take hold, which would explain why the ZAR has outperformed most other emerging markets for the month to date. However, that does not preclude inflation from experiencing a short-term spike, and that spike will undermine the stability and strength of SA’s economic recovery.
  • The risk of more hawkish comments from the SARB next week should not be underestimated. For the ZAR, the probability is higher the SARB indicates that the risks to inflation remain tilted to the topside and that further action is needed. It could prove to be the catalyst for further ZAR appreciation through the course of the month.
  • Technically speaking, any break below 15.2500 would open the door for a potential assault on fairly weak support at 15.1500 and the 15.00 handle after that. More good news for SA is that the government is now actively debating ending the State of Disaster. This would be in line with the loosening of restrictions in the UK and could easily be justified in SA’s case. It would offer a fantastic boost to the economy and would start the year off on an encouraging footing. It might also generate the kind of sentiment that helps the ZAR appreciate further in the near term. 

Nicholas Kabaso

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