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Local Market Commentary
- It is a quiet end to the week in Zambia with no data on the cards. Next week will see ZamStats publish the February CPI data. The Bank of Zambia, earlier this week, kept its policy rate unchanged at 9.0%, citing a “sharp deceleration in inflation since December and some fragility in growth. While inflation is forecast to trend towards its 6-8% target range over the next eight quarters, it is worth noting that upside risks exist. These include adverse weather conditions, supply chain bottlenecks, surging energy prices, an anticipated increase in power tariffs, and a weaker Zambia Kwacha.
- In the base metals market, copper has recorded marginal gains this morning adding 0.5% during the Asian session which has almost wiped out the 0.64% loss the 3m benchmark recorded yesterday. The red metal remains focused on the economic backdrop which for now is threatened in the short term due to higher rates and the threat of conflict in Eastern Europe.
- In the FX markets, the Zambian Kwacha may come under some slight selling pressure next week as offshore inflows from this week’s bond auction dry up.
- While the near-term outlook for the U.S. economy is rosy, the medium to longer-term outlook is turning cloudy. A number of factors, including soaring inflation and expectations for tighter monetary policy conditions, are weighing on the longer-term outlook for the U.S. economy. As always, the leading indicator will provide some valuable insight into the health of the U.S. economy and the growth outlook for the world’s largest economy. For now, the indicator suggests that the recovery is set to persist this year, despite expectations for several rate hikes.
- Geopolitically, concerning Ukraine, the U.S. remains in the thick of it and has accepted an invitation to meet Russia next week on the condition that they do not invade Ukraine. Russia is raising the ante for the West to honour the Minsk agreements that were never fully implemented, but the U.S. remains unconvinced of Russia’s motives. The U.S. still believes that Russia is angling for an invasion. Russia, for its part, contends that it is not looking to invade Ukraine. That being said, Russian President Putin will use the opportunity to gain some concessions out of Europe.
- There does not appear to be any safe-haven bid coming to the rescue of the USD, not even with the prospect of the Fed front-running its tightening and hiking rates more aggressively. The USD’s lack of response to Bullard’s hawkish comments also suggests that there are a lot of rate hikes priced in or that the market no longer believes him. Either way, there is no obvious reason to pile into the USD unless one anticipates a full-blown war to spark a big sell-off in global equity markets and a sharp rise in risk aversion.
Rand and International FX Commentary
- As we close out a strong week for the ZAR, we are reminded of its status as a commodity currency, especially one driven in part by the behaviour of the gold price. Geopolitical tensions throughout the week led to a surge in the gold price, which has turned into a catalyst for ZAR appreciation. As a result, it has become one of the better-performing currencies through the week, with a rise in geopolitical tensions uncharacteristically supporting the ZAR’s performance.
- Therefore, the focus will remain on developments concerning Russia’s build-up of troops on the Ukraine border. With both Russia and the West conducting their own form of propaganda, it isn’t easy to understand the actual state of play. Suffice to say that risks and uncertainty remain high, and while the prospect for war exists, the gold price will remain elevated and support gold producing currencies, including the ZAR.
- Focus will also turn to next week’s budget and the guidance that will hold. For SA, this is another massively important event that holds clues on whether SA can reform, grow, and tackle many of its structural problems or whether the gradual de-industrialisation and malaise in the economy are set to continue. SONA and recent comments from the finance ministry give the impression of a more reformist agenda. Should that indeed be announced, the ZAR may well perform well. A disappointing budget that shows no signs of material policy improvement will re-emphasise the risks associated with SA.
- Intra-day, recognition should be given to the very impressive appreciative performance the ZAR has achieved this week. Given the looming budget and geopolitical tensions that will not abate this weekend, there is room for some profit-taking to take place. That would be healthy, not something to read too much into. At the very least, the ZAR is overdue a phase of consolidation, and to be fair, the ZAR’s appreciation has not been without justification. Furthermore, it has been incremental and based on global market developments rather than a strong reaction to anything idiosyncratic.