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CPI print headlines domestic data card next week

March 25, 2022by Nicholas Kabaso
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Local Market Commentary

  • It is a quiet end to the week in Zambia amid a dearth of domestic data. Next week, several macroeconomic releases, namely CPI, GDP, and trade balance data, are on the cards. Regarding the former, inflation has slowed for the past seven months and supports the Bank of Zambia’s view that inflation is trending downwards. If sustained, this may persuade policymakers to keep the policy rate unchanged at the next meeting. That said, it is worth noting the 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).
  • This year, the ZMW has broadly traded on the back foot and is ranked the third-worst performing African currency among those tracked by Bloomberg on a year-to-date basis. Demand for hard currency from importers and corporates on the back of improving economic activity has outpaced available supply and thus weighed on the ZMW.
  • However, looking to next week, the ZMW is expected to hold steady, supported by currency sales by corporates preparing to pay salaries and other month-end dues.
  • In the base metals complex, copper is trading with a bid tone this morning; the red metal has added just short of 0.25% on the session to trade at $10373.00/tonne into the open. For now movements in copper have taken a back seat as the world unpacks how nickel markets have the potential to upend a number of commodity traders. 
  • Heading into the weekend, the USD appears to be on the defensive. It has again failed to capitalise on any elevated levels of risk aversion brought about by the war. U.S. inflation is running hot and above many of its trading partners. At the same time, its more hawkish tone is also being matched by other central banks worldwide, taking some of the sting out of its ability to appreciate. Both the EUR and the GBP have made slight advances ahead of the weekend, as has the gold price. This does not appear to be a market that is strongly supportive of the USD. While the JPY continues its slide through 122.50 this morning, the GBP has recovered back above 1.32, while the EUR is back above 1.1000.

Rand and International FX Commentary

  • Several stars aligned for the ZAR, propelling the ZAR to the strongest levels since October 2021. Internationally, the USD has struggled to gain much traction despite a rise in risk aversion, while commodity prices have supported commodity currencies. SA’s terms of trade have been strengthened and remain well elevated, and had it not been for the oil price, SA would’ve been in an exceptionally unique position to take full advantage of the consequences of the war in Ukraine.
  • Furthermore, carry trades appear to be back on, with some low yielding jurisdictions such as Japan unable to respond to the tightening guidance by the Fed. The JPY has been left to flounder and is now closing out the third consecutive week of losses. The result has encouraged carry trades with the JPY reclaiming its status as the world’s funding currency. Against this backdrop, the SARB’s hawkish hike raised some eyebrows yesterday and reinforced its conservatism, with the prospect of a 50bp rate hike now deemed more realistic.
  • The result was almost immediate, with the ZAR crashing below the 14.50 mark and showing signs of extending its appreciation. A conservative monetary and fiscal policy is a powerful combination in supporting the ZAR. Coupled with the commodity cycle and the ZAR’s undervalued position, a strong argument could be made for the current bout of ZAR strength. It has contributed to SA’s contained inflation environment, which is now more benign than many of its developed economy trading partners.
  • Ahead of the weekend, the war in Ukraine no longer appears to be much of a deterrent to ZAR bulls. On the contrary, the ZAR is one of the few currencies that can offer investors and speculators somewhere to invest during the uncertainty of war. Even if the war were to end today, the improvement in risk appetite would likely outweigh any retreat in commodity prices. Commodity markets will still suffer from supply chain issues and less productive capacity, leaving the ZAR in a unique position to capitalise. The only strong argument against anticipating further ZAR appreciation is that it has appreciated some 10% since the start of the year. More recently, it has exceeded most expectations and may be due to a near-term correction. However, at the time of writing, none of the technical indicators offered a USD buy signal.

Nicholas Kabaso

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