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Local Market Commentary
- Data from ZamStats showed that Zambia’s copper exports remained relatively unchanged in Q1 despite improved prices on the international market, as the country had to contend with operational disruptions. In the three months to March 2021, copper exports increased marginally to 464,800 metric tons from 463,700 tons exported in the same period last year. Note that state miner ZCCM-IH has been struggling to steady operations at least for large-scale copper mines on the Copperbelt province, since the start of the year. Zamstats has warned that rising concerns of a worse-than-expected economic slowdown in China which imports at least 40% of Zambia’s copper output, could further weigh on prices and much-needed foreign exchange income.
- The industrial metals complex took it on the chin yesterday with losses recorded across the board. Investors took shelter ahead of the Fed decision on rates today. Base metal counters are concerned that a hawkish Fed will pare US economic growth and this comes at a time when there are already growth concerns surrounding China following the COVID-19 lockdowns.
- Copper finished 3.75% lower on the day with the benchmark 3m contract closing at $9410.00/tonne. Some of the negativity came from news that the International Copper Study Group expects to see a surplus of 142 000 tonnes this year followed by another surplus of 352 000 tonnes in 2023.
- There has been a mild recovery in base metal prices this morning as bargain hunters enter the market, we do however expect caution to prevail ahead of the FOMC meeting this evening. Traders will be watching closely to see if the Fed follows through on recent communication and front loads its tightening cycle with a 50bps rate hike. It is widely expected that the Fed will use the opportunity to send a clear message that it is committed to reining in inflation even as growth concerns intensify following the miss in the Q1 GDP print. Notwithstanding the renewed growth concerns, we expect the Fed to stick to its guidance and raise rates by 50bps at its May meeting.
- The risk is that the markets have overpriced the hawkishness of the Fed. Should the statement be even the slightest bit dovish, we could see the dollar come under pressure which would see gold and other commodities rally. We hold the view that much hawkishness has been priced in and thus the risk is towards the dovish side.
- Moving over to the FX markets, Zambia bulls were on the front foot at the start of a holiday-shortened trading week. According to Reuters data, the local unit firmed to move further below the 17.00 mark. Meanwhile, it is an important week for the U.S., starting with the FOMC decision this evening, where the Fed will also offer an update to its guidance. Investors anticipate that the Fed will hike rates by 50bp at least and deliver a hawkish message. How hawkish will determine how the USD and U.S. markets will perform. Equities have shown themselves to be vulnerable to the Fed’s utterances. Today, the focus will be on whether the Fed has managed to balance tackling inflation and not stifling growth. The USD has predictably settled into a consolidative holding pattern, and that trading behaviour has spilt over into the majors. The EUR-USD continues to trade around the 1.0500 mark, while the GBP consolidates just below 1.2500.
Rand and International FX Commentary
- Monday’s bout of depreciation was exacerbated by thin market conditions. It was always going to be tough to consolidate, given the ZAR’s undervaluation and the attractive rates on offer to investors. Not even the resumption of load shedding or the rising expectations of central bank tightening was enough to prompt a further slide in the ZAR. On the contrary, the ZAR made a recovery and leveraged off a slight improvement in risk appetite as the VIX reversed off its highs and the USD itself settled into a tighter range, reluctant to appreciate any further ahead of the FOMC decision and guidance which will be delivered later today.
- This morning, the domestic news flow has improved slightly. The NPA managed to recover some R1bn of Gupta-linked assets indicating that some progress is finally being made. National Treasury is looking to create a uniform compensation structure for all public sector managers to regain control of the wage bill. It will allow the authorities to better coordinate the government’s wage-bill strategy across government structures. Finally, Finance Minister Godongwana has intervened by sending in experts to push through the metro’s financial recovery plan. These are all positive developments that may assist sentiment at the margin, although non are not direct market-moving events.
- Nonetheless, it is worth noting that many of the tailwinds to the ZAR are still blowing, albeit with less force. Commodity prices are still elevated enough to support the trade, and the current accounts remain in surplus. Although SA’s rates above the US have narrowed, the carry advantage still persists. As reflected in ETM’s ZAR Sentiment Indicator, ZAR Sentiment remains positive and points to recovery, while the risk of further fiscal slippage is dissipating as the government slowly but surely implements reforms to stabilise the state.
- Emerging market currencies performed a little better yesterday and could extend that improved performance through today. Technically speaking, the USD-ZAR is ripe for a retreat, and the catalyst may come from a softening of the Fed’s stance this evening in response to the global growth risks that have emerged. Given just how much Fed tightening investors have priced in, a softer stance may simply be for the FOMC to turn less hawkish, for the USD to give up some of its recent appreciation. Therefore, all eyes will turn to the Fed this evening and the BoE tomorrow for further guidance.