- Front and centre of domestic markets in Zambia today will be the Bank of Zambia (BoZ) policy rate decision on Wednesday. At the final meeting of 2020, the BoZ kept its main policy rate unchanged at a record low of 8.0% to allow the impact of previous rate cuts to filter through the economy. Recall the BoZ reduced the policy rate by 350bps in 2020. Moreover, the bank indicated that the decision was also premised on the fact that raising the policy rate given the high level of inflation would have resulted in a further contraction in economic activity and threatened the stability of the financial sector. Conversely, a rate cut to further support the economy could have placed further pressure on the Kwacha and worsened the inflation outlook.
- Since the last meeting, inflation has accelerated to the fastest pace since August 2016 and remains elevated above the 6%-8% BoZ target range. The Zambian Kwacha, which is the third-worst performing African currency against the USD, down by over 2% on a YTD basis amid deteriorating fiscal dynamics, has in part underpinned inflation. Overall, inflation remains elevated in Zambia. Along with deep-seated fiscal challenges, room for the central bank to support an economy struggling amid the coronavirus pandemic is, therefore, limited going forward.
- The copper market has defied a stronger USD this morning, instead choosing to focus more broadly on the economic recovery which is going to be driven by massive amounts of stimulus. Both Goldman Sachs and Citibank have raised their 12-month price target for copper to some $10 000/tonne while the Australian banking giant ANZ was more conservative penciling in a price of $9000.00/tonne.
- Copper smelting activity fell in January on a global basis led by the United States and Europe who were still battling a second wave of COVID-19 which dampened industrial activity. China dipped mildly but this dip was preceded by a period of quite intense activity according to the satellite service SAVANT and broker Marex Spectron.
- On the international front, new Covid cases in the US have fallen for the fifth week in succession and the trends are on a clear downward path. The combination of natural immunity from those that have caught Covid and recovered and the vaccination drive should see these numbers continue to decline and for the economy to reopen. It is widely believed that there will be no more lockdowns following the completion of this latest wave of infections.
- US Treasury yields are rising steadily in what reflects growing optimism about prospects for the US economy. However, as they do they also ensure that the business cycle does not overheat. It is the market seeking to rebalance, although it is clear that the Fed’s large QE efforts are still playing a significant distortionary role in stock markets and other asset prices. Rising bond yields are something for investors to keep a close watch on as it may have implications for longer term growth prospects, may signal an inflation episode despite the Fed’s more sanguine guidance and could change perceptions on the USD.
- Shifting to the FX complex, a bearish bias remains entrenched on the Kwacha. The local unit continues to struggle as demand for hard currency continues to surpass supply.
- Yesterday the USD bounced off its recent lows. The rise in US bond yields and expectations of an inflation episode as a result of the sharp acceleration in money supply means that the USD has found some support for now. Recent trading sessions have shown a reluctance on the part of the USD to weaken further, with investors clearly waiting for a catalyst to help the USD stage a mini-recovery. With the Biden stimulus effort also waiting in the wings, investors will continue pricing in a stronger GDP boost.
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