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CPI and trade data headline domestic calendar

February 24, 2022by Nicholas Kabaso
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Local Market Commentary

  • Zambian CPI and trade balance data are due today. The Bank of Zambia, earlier last 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 (ZMW). The ZMW (-5.57%) has been the second-worst performing African currency against the USD tracked by Bloomberg as a limited supply of hard currency has weighed.
  • In the base metals complex, copper continues to slip as the threat of all-out war in Eastern Europe looms. Investors are concerned that this may derail the economic recovery in the short term. We would however like to remind readers that all-out war requires vast resources to be deployed and these conditions often result in base metals prices rising as demand for these to fuel a war machine increase.
  • Moving over to the U.S., the focus now rests squarely with developments in Ukraine and what sort of role the U.S. will adopt in the conflict. President Biden was quick off the market to highlight that the U.S. will join its G7 allies to hold Russia accountable. They will no doubt map out more severe measures on Russia, which will impact more heavily on the economy. The sanctions will aim to cripple the Russian economy and raise the prospect of such punitive measures being used elsewhere should any other countries have the desire to follow Russia’s example.
  • The USD popped higher as the safe-haven bid came back into focus. However, it has not surged substantially higher in a runaway move. The market is now looking to price out the prospect of aggressive hiking and monetary policy normalisation by the Fed. How stock markets respond, how the Fed reacts and how global levels of risk aversion spike will determine whether there is more left in this move. Suppose investors look through the current spike, and the USD is unable to capitalise on current geopolitical developments. In that case, it may point to the USD being vulnerable over the medium to longer term.

Rand and International FX Commentary

  • All bets are off. Just as the world started coming to terms with living with Covid 19, Russia has invaded Ukraine with reports of missile attacks and explosions heard in Kyiv, according to NBC news. In so doing, Putin is testing the resolve and the relevance of the EU, NATO and Western leaders to stand up and stop him. This will offer a clear perspective on the strength of leadership in the West and what could meaningfully be done in a scenario of an all-out war. There are serious questions over whether modern leaders have the stomach for this and whether their de-prioritisation of military spending has now left them vulnerable.
  • This now holds a wide variety of implications for Europe’s economy, fiscal policy, geopolitics, and commodity prices, especially oil. It appears as though a new post-Cold War era has now begun. This action by Russia could be a game-changer in that it directly challenges the status quo and will give world leaders something to focus on other than Covid-19. 
  • Stock markets have responded predictably and sold off aggressively, global levels of risk aversion have spiked, as has the oil price to over $100pb. The world now has a real problem, and Russia’s behaviour will be a catalyst to change the stance of central banks, oil producers and governments more broadly. In SA’s case, the spike in oil prices has been matched by a rise in the gold price, which could render the ZAR more resilient than other EM currencies, but judging from the overnight move, the ZAR is still vulnerable. Much will depend on what happens next and the strength of retaliation. If the retaliation only comes in the form of sanctions, this will embolden Putin and render him more than just a “regional power”, as described by the US recently.
  • So just one day after the budget and SA’s fiscal policies are no longer in the spotlight, although this news could derail many of the forecasts on which the budget is based. Equally, a sharp sell-off in ZAR and a further hit to global growth could see SA’s budget deficit outlook erode once more to leave National Treasury with lots to do to ensure sustainability. These are fluid and uncertain times, and in the face of this uncertainty, the ZAR will likely experience higher volatility and may not have the strength to ward off a global rotation to safety, despite its link to gold.

Nicholas Kabaso

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