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All eyes on CPI and Trade data this week

March 23, 2021by Nicholas Kabaso
  • It was a quiet start to the week in Zambia amid a dearth of domestic data. Note, on Thursday the latest inflation and trade numbers are due. In February headline inflation accelerated further, coming in at 22.2% y/y from 21.5% y/y in the month prior, underpinned by food prices which rose at the fastest pace in at least a decade. With inflation moving further away from the upper band of the  Bank of Zambia’s (BoZ)  6%-8% target range, risks exist for the bank to hike rates further in the coming months, as communicated at the last policy meeting. A Kwacha, which is down by nearly 4% on a YTD basis, making it the worst performing African currency, is also driving inflation.
  • Meanwhile, Zambia’s trade surplus surged to ZMW 9.3bn in January from an upwardly revised ZMW 6.5bn (prior: ZMW 6.3bn) in December, marking a record high according to Bloomberg data. A bullish copper narrative should see the trade account remain supported in the coming months.
  • An official in the Zambian Ministry of Agriculture has indicated that Zambia is poised for a bumper harvest this season due to good crop stand throughout the county and the use of smart agricultural technologies by farmers. The official added that the ministry had commenced the crop forecast survey for the 2020/21 agricultural season in which crop yields will be announced in May 2021.  
  • On the base metals front,  the IWCC has stated that scrapping the LME trading floor will eliminate the LME copper price as a single reference point for the industry according to a report published by Bloomberg. “The Ring is recognized and accepted globally as the cornerstone of the LME’s price discovery process. It functions well to the satisfaction of all parties. If it is not broken, then don’t fix it.”
  • All eyes were on Fed Chairman Jerome Powell yesterday who stated that the US economy is “much improved” crediting the Fed and Congress for providing “unprecedented” support. He was quick to warn that the recovery is still far from complete and this sets the stage for his briefing on the economy to a congressional hearing later today.  The lawmakers are expected to flood the Chairman with questions surrounding the Fed’s super easing stance which includes the pace of bond buying at $120bn per month.
  • Given this backdrop its easy to understand the market’s fixation with the US bond auction calendar this week. The market will have to absorb north of $60bn this week across maturities that have sold off aggressively as the reflation trade gains traction. As always the question will be whether or not the “fixed income system plumbing” will function as intended and whether or not the absorption of the debt will be smooth and unhindered.  
  • On the geopolitical front, new sanctions against China came into force yesterday. The United States, Canada, Britain and the EU imposed sanc-tions on Chinese officials as a result of alleged human rights abuses in Xinjiang. Beijing hit back swiftly with punitive measures against the EU which at face value appear far broader than those levied against it by the single currency bloc. The Chinese have banned European lawmakers, diplomats, institutes and families from trading with China. Those wishing for a less frosty US-Sino relationship under the Biden administration may have some time to wait still. Biden looks likely to continue to the pressure seen under the Trump administration for now.
  • In the FX markets, the Kwacha plunged to a fresh low yesterday as Zambia’s debt challenges underpin negative sentiment, denting investment inflows. Month-end hard currency sales could however provide some reprieve at the margin.
  • The international FX markets have seen a rotation to safety ahead of Powell’s testimony later today. Adding to the risk off tone seen in Asia has been the Sino tensions with the West and the reciprocal sanctions put in place.  The more liquid emerging market currencies have fared the worst with the likes of the ZAR and MXN shedding around 0.70% ahead of the EU open. The NZD was the major underperformer of the majors falling some 1% to trade at 0.7084 a new YTD low, this came on the back of a raft of measures introduced by the government to cool the overheating New Zealand housing market which should take the pressure of the Central Bank to hike rates. 

Nicholas Kabaso

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