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Bank of Zambia exploring digital currency

February 9, 2022by Nicholas Kabaso
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Local Market Commentary

  • The Bank of Zambia (BoZ) is exploring digital currency. The BoZ expects to complete research on forming a digital currency that could reduce transaction costs and boost participation in the formal financial system by Q4 2022. According to the acting assistant director of communications at the BoZ Nkatya Kabwe, “the results of the research will form part of the input in the policy considerations on whether to introduce a central bank digital currency in Zambia.” Kabwe added the central bank is researching GovCoins as they have the potential to expand financial inclusion, improve traceability, safety, and efficiency of payment systems. Note Zambia joins nations such as Israel, Ghana, the Bahamas, Nigeria, China and the U.S. that are toying with the idea or have issued a digital version of their currencies to keep up with technological advances that have spurred the rise of Bitcoin and other private initiatives.
  • Data recently released by the Chinese customs agency showed that trade between Africa and China rose to a record high in 2021. Specifically, the value of trade between Africa and China rose by 35% from 2020 to $254bn last year, mainly due to an increase in Chinese exports to the continent. This rise occurred despite last year’s global supply chain challenges and other interruptions caused by the covid-19 pandemic. The data from the customs agency further cements China’s position of being Africa’s largest trading partner.
  • In the base metals complex, copper finished flat yesterday but the red metal has edged higher this morning in the Asian session as a softer dollar and elevated risk appetite underpinned the price action. The 3m LME benchmark is currently trading some 0.4% higher on the session at $9818.00/tonnne as we head into the EU open. Investors will continue to focus on the low inventories and potential supply issues out of Peru which we think provides a strong floor for the metal currently.
  • In the local FX market, consolidation was the order of the day as the Zambia Kwacha (ZMW) closed little-changed against the USD, halting the recent sell-off.  Higher demand for hard currency has primarily weighed on the ZMW (-10.0%), making it the worst-performing African currency on a year-to-date basis among those tracked by Bloomberg.
  • Moving over to the U.S., trade data released yesterday made for some disappointing reading for the U.S. as it recorded a fresh record of $859.1bn, representing a 27% surge. Adding insult to injury was the deficit to China that surged $45bn to $355.3bn, which was the largest deficit in ten years and confirmed that China is falling well short of its phase one commitment to help reduce the U.S.’s trade deficit. The pressure will be on the U.S. authorities to act on this, and while much of the result could be blamed on the pandemic, which was unusual, there is clearly a lot of work to do. One factor that will help the trade deficit narrow will be the normalisation of U.S. monetary policy and the influence that it will exert on the credit cycle. Weaker demand will also detract from the demand for imports.
  • The U.S. has passed a bill to avert a government shutdown in other news. That is not surprising and was to be expected. However, it still contributes to improved risk appetite and removes another concern for investors to price in.
  • Ahead of the U.S. inflation data tomorrow, the USD remains in consolidative mode, not favouring any clear-cut direction. Although risk appetite has returned, the rise in UST yields seems to have investors comfortable that the USD is not about to collapse. The outcome of tomorrow’s data will be key. A strong rise in inflation will spark concerns the Fed may need to be more aggressive, although, to some degree, much of that has already been priced in. For now, the market is expected to continue trading in a range.

Rand and International FX Commentary

  • It is not entirely clear what specific catalyst helped trigger the bout of appreciation on the ZAR, but there was at least some good news for the ZAR market to digest yesterday. For starters, Eskom appears to have called an end to load shedding and one can only hope that it will last this time. Loadshedding does tend to influence the value of the ZAR; however, just as important if not more important has been the recovery in commodity prices and the assistance it has give to boosting SA’s terms of trade. 
  • The CRB Industrials Metals index has surged in the past two weeks, which is difficult to ignore. For a commodity currency such as the ZAR, this is indeed good news and suggests that commodity prices excluding oil can rise even further as the global economy gradually recovers and bolsters demand. Given the role that high commodity prices have played in boosting the trade and current account surpluses as well as the boost it gave the fiscus, this is a windfall that SA traders will latch on to.
  • Interestingly, the ZAR appreciation comes when the USD has steadied, so none of the ZAR’s appreciation can be attributed to a weaker USD. In fact, through yesterday’s trade, the opposite holds true. Also assisting the ZAR has been the rally in the gold price while the platinum price has also caught a more bid tone.
  • Global stock markets are also a little firmer to drive the VIX lower, which will raise risk appetites, so it really is a combination of factors that collectively have tilted the scales in favour of the ZAR. But even before this, ETM calculations show that the ZAR was undervalued, that it ranked third out of twenty-two countries in carry attractiveness, that ZAR sentiment was neutral and that its currency resilience ranking was higher than either the USD or the EUR. In other words, the backdrop was ZAR supportive before the latest recovery in commodity prices.

Nicholas Kabaso

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