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Bank of Zambia to meet this week

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Local Market Commentary

  • In the base metals complex, there has been some positive news over the weekend coming out of China which has buoyed base metal sentiment in Asia. Beijing’s financial authorities have allowed a further reduction in mortgage loan rates for some buyers in an attempt to revive the property market while there has been an announcement that Shanghai will gradually begin reopening businesses such as shopping malls and hair salons from today.
  • On the news front, the LME is in the spotlight after proposing measures which would improve transparency and stability in the OTC metals market following the nickel debacle earlier this year which was caused by a massive OTC position. The exchange is proposing a more rigorous framework for reporting of all OTC positions, it also proposed that holders of large OTC positions should tell the exchange why they held them.
  • While the domestic data card is empty at the start of the week, the main event will be the Bank of Zambia rate decision later this week. With inflation slowing for a ninth consecutive month in April to a two-and-half low, policymakers are likely to vote to keep the policy rate unchanged at 9%. This will support the economy’s recovery and may aid the Zambian Kwacha, which has strengthened against the USD since April, helping offset price pressures from rising gasoline and wheat costs.
  • Moving over to te US, they release today will be the Empire State manufacturing index reading. The Empire State manufacturing index suggested an improvement in general business conditions in the state of New York in April as it rose unexpectedly to a four-month high of 24.6, surpassing consensus expectations of a slight recovery to 1.0 from -11.8 in March. While there were improvements in the measures of orders and shipments, and a decline in delivery times as supply chains constraints are easing, factory employment growth softened. This feeds the view that some choppy conditions are still facing the manufacturing industry, further substantiated by a deterioration in expectations for future business conditions which fell to one of the lowest readings since the start of the pandemic. Additionally, the main driver of the headline index’s increase was the index of prices paid which rose to the highest on records back to 2001. This highlights the effects of the Russia-Ukraine war on commodity prices and suggests inflationary pressures could persist for longer.
  • In the FX markets, positive sentiment amid rising investor confidence in the local economy should see the Zambian Kwacha firm this week. Note that the first meeting of Zambia’s creditors is expected to occur this week, Finance Minister Situmbeko Musokotwane said last week, adding that debt talks should be concluded by June. The improving mining outlook and credit talks are set to boost sentiment.
  • The USD has started the week firmly on the front foot, with a strong safe-haven bid back in the market. On a trade-weighted basis, the USD is now trading just shy of a twenty-year high, highlighting the concern investors have about the ability of central banks to quell inflation without sending the global economy into another recession. Thus far, the communication from the Fed has been extremely tough, and while warranted, it has repercussions elsewhere in the world and across various markets. The weak growth outlook was again highlighted this morning in China, as its data was disappointed courtesy of the strong Covid lockdown response. The EUR cracked lower last week and is one step closer to parity with the USD as it consolidates around 1.04/dlr, while the GBP has similarly consolidated at the weaker 1.2250 level. The JPY, for its part, continues to struggle to make back lost ground, despite its highly oversold position, highlighting the central bank disparity argument.

Rand and International FX Commentary

  • There is a lot for investors to consider at the start of the week. The ZAR starts it on the defensive, with a topside breakthrough of 16.2850 likely to result in a substantially bigger move. The main event will be the SARB’s decision on interest rates. Another hike is inevitable, but whether that comes with a 25bp or a 50bp hike is debatable. The SARB has moved pre-emptively and front-run the Fed to ease some pressure to respond forcefully, especially as inflation remains within the 3-6% target band. The SARB, therefore, enjoys some flexibility with which to respond.
  • What makes matters a little trickier has been the recent behaviour of the ZAR. While one could argue that the depreciation has come alongside other emerging market currencies, that may not be enough to dissuade the SARB from taking more pre-emptive action to ensure that it is not singled out as a currency that is vulnerable to speculation. At the same time, the SARB will be mindful of the weak state of the SA economy. It is a difficult balancing act but will be scrutinised this week and holds implications for the performance of the ZAR.
  • On that front, it has been encouraging to see Fin Min Godongwana again extolling the virtues of private sector inclusion in the economy. He is actively encouraging investment by the private sector in different industries to bolster fixed capital formation and ease the pressure on the government to do all of the heavy lifting. It is long overdue and arguably comes too late, but it is the only real option to resurrect SA’s infrastructural backbone on which everything operates.
  • Had it not been for these structural deficiencies and the economy had the potential to grow even faster, the SARB might’ve already moved to hike interest rates more aggressively as other central banks have done around the world. So the SARB’s guidance this week will be key to understanding its expectations and perspectives. It could also play a determining role in the broader direction of the ZAR.

Nicholas Kabaso

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