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Local Market Commentary
- Headline inflation in Zambia slowed further in February, coming in at 14.2% y/y from 15.1% y/y in January. This was the seventh straight month that inflation slowed as the cost of meat and school fees eased. On a month-on-month basis, prices climbed 1.7%. A breakdown of the data from ZamStats showed that food price inflation slowed to 16% in February from 16.9% in January, while non-food price inflation decelerated to 11.8% from 12.7%.
- The slowdown supports the Bank of Zambia’s view that inflation is trending downward and, if sustained, may persuade policymakers to keep the policy rate unchanged at the next meeting. Recall the BoZ last week said that inflation has slowed faster than anticipated and is forecast to average 13.2% in 2022, compared with the 15% projected at the previous MPC meeting in November. 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).
- Regarding the ZMW, it has been a difficult start to the year, with the currency ranked as the second-worst performing African currency on a year-to-date basis against the USD. The ZMW is down by nearly 6.0% amid tight FX liquidity conditions. 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. Economic conditions are expected to improve further, and thus the demand for hard currency will remain strong while the ongoing dollarisation of mining taxes will keep the supply side generally stifled. This suggests that the ZMW will remain on the defensive in the near term and poses a notable risk to the inflation outlook.
- Meanwhile, Zambia’s trade surplus narrowed further in January, coming in at ZMW 6.5bn from ZMW 6.8bn in the month prior. The surplus also narrowed in comparison to the comparable period a year earlier. A breakdown of the trade data shows that exports fell by 6.0% to ZMW 16.7bn in January from ZMW 17.7bn while imports decreased by 6.9% to ZMW 10.2bn.
- In the base metals complex, copper has cleared the $9900.00/tonne mark this morning after remaining very much on the sidelines of late. There are still concerns over the economic impact on the EU should the Ukrainian conflict escalate and become a long protracted war. For now most of the investment community are viewing it as a regional issue however they are not taking any chances as geopolitics is uncertain at the best of times.
- President Biden yesterday announced the imposition of sanctions on Russia in retaliation for its invasion of Ukraine. The sanctions restrict Russia’s trade in foreign currency and will target state-owned enterprises and Russia’s banks directly. The objective is to plunge the Russian economy into a deep recession and hardship. Doing so will test the Russian electorate’s tolerance for Vladimir Putin and his administration and act as a deterrent to other countries taking inspiration from Russia’s aggressive geopolitical stance. It remains difficult to anticipate the longer-term consequences of all of this. Suffice to say, that it will likely be a catalyst for some significant structural changes in the global economy concerning energy independence, military spending, and strategic alliances.
- Yesterday’s surge in the USD reversed overnight and has brought into question whether current developments will be enough to trigger the next leg stronger in the USD. At face value, it appears as though there is still some apprehension to back the USD wholesale when the developments in Ukraine is not enough to derail the global economic recovery or financial markets more broadly. The effects of all the stimulation applied in the past two years has yet to manifest across financial markets fully, and any rise in risk aversion will likely prove temporary.
Rand and International FX Commentary
- Financial markets will be difficult to trade until the dust has settled on global geopolitics that for now remain fraught with uncertainty. Strong cross winds dominate, as the fear of war in Europe contrasts starkly with the buying opportunities a sharp sell-off in assets offers investors, brave enough to believe that the world will recover, and the effects of all the stimulation applied in previous months will eventually manifest in higher asset prices.
- The ZAR has been caught up in these crosswinds in the past few trading sessions, and if one can avoid trading such a wild market, one should. It is clear that volatility will be with us for a while to come and that such volatility makes directional momentum difficult to identify. What is unfolding has precious little to do with anything fundamental, and applying traditional analysis is not helpful. Therefore, position-taking has become a lottery, and trading is nothing more than speculative.
- Moreover, investors will not understand the full consequences of Russia’s invasion of Ukraine for a long time to come. It will affect monetary and fiscal policies, change defence budgets across Europe, alter geopolitical strategies for decades to come, impact commodity prices, especially oil, and likely influence how Europe and the world choose to utilise energy. This event will likely prove a catalyst for some deep-rooted changes that will probably have far-reaching consequences not yet understood.
- Overnight, the stunning recovery in US equity markets has brought some calm to risk markets, and the ZAR has made an impressive recovery. Ahead of the weekend when so much could change implies that neutral positions will likely be favoured, which is prudent. The sharp sell-off that followed news of Ukraine’s invasion could easily unwind. Investors are urged not to trade on the panic or take any long-term decisions on currency hedging until some normality returns to trading behaviour.