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Domestic focus rests on the Bank of Zambia today

May 18, 2022by Nicholas Kabaso
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Local Market Commentary

  • In the next two weeks, five out of eight major African central banks will meet to decide on their policy rates. In the Southern African region, the South African Reserve Bank (SARB) and the Bank of Zambia (BoZ) will meet this week. The Bank of Zambia (BoZ) is set to decide on its policy rate today. With inflation slowing for a ninth consecutive month in April to a two-and-half low, policymakers at the BoZ are likely to vote to keep the policy rate unchanged at 9%. This will support the economy’s recovery and may aid the Zambian Kwacha, which has strengthened against the USD since April, helping offset price pressures from rising gasoline and wheat costs.
  • Notwithstanding the recent weakness in the ZAR, we expect the SARB to deliver another 25bps rate hike this week as policymakers play a delicate balancing act of reining in inflation expectations while at the same time trying not to throttle the economy. That said, there is notable risk of an outsize rate hike given that inflation risks remain skewed firmly to the upside.          
  • While we expect the SARB to hike by 25bps, the professional market is pricing in roughly 50bps worth of rate hike risk per a meeting for the remaining four MPC meetings this year. This is followed up by around 30bps of rate hike risk per meeting in 2023. In our view, this is excessive given SA’s weak macroeconomic conditions and relatively tight credit dynamics. The SARB has thus far been prudent in its monetary policy, raising rates by a cumulative 75bps since the tightening cycle commenced in November 2021, demonstrating its commitment to restoring medium-term inflation expectations. We expect the SARB to continue with its gradual policy tightening in the months ahead, even as major central banks such as the Fed front-load their rate hiking cycles.
  • In the base metals complex, copper has come under pressure this morning as investors align comments from the Fed Chairman with reduced economic dynamism. Equally data out of China has not been positive lately, and the latest data namely new home prices in April fell for the first time since December on a month on month basis as the COVID-19 lockdowns took their toll.
  • From the supply side, investors are keeping an eye on developments in Peru. Social conflicts in the country such as the one which halted production at the huge Las Bambas deposit is threatening a mining investment pipeline which is thought to be in the region of $53bn. “Without any world-class projects on the horizon, the prospects for sustaining production are not good,” said Gonzalo Tamayo, analyst at Macroconsult and a former Peruvian mines and energy minister
  • Moving over to the US, data released yesterday showed that retail sales came in at $671.7bn in April, which was a record high in nominal terms and marked a more than 8% rise year-on-year. When adjusted for the US CPI Index, however, sales were pretty much flat with a minor 0.04% contraction, and this suggests that while US consumption rates are holding up, upside pressure on prices has stifled real growth.
  • Moreover, it is concerning to note anecdotal evidence pointing to pressure on consumer balance sheets, with market commentators highlighting an increase in credit card use, which tends to suggest that consumers are struggling to maintain consumption patterns with their current income. With comments from Fed’s Bullard yesterday confirming that the Fed should continue tightening monetary policy at 50bp for the next two meetings at least, the economy remains at risk of significant slowdown in the months ahead. Forward guidance from the ECB has also favoured a relatively aggressive tightening cycle. 
  • In the session ahead, MBA mortgage applications, housing starts, building permits and some Fed speak are scheduled which could drive the USD direction.
  • Yesterday, the USD came under considerable pressure. Surges in both the EUR and the GBP helped cement the move as a general improvement in investors’ sentiment reduced the need for any safe-haven investments. Solid US retail sales, good UK jobs data, improving covid news out of China and talk of a 50bp hike by the ECB all helped the EUR back above 1.0530 and the GBP back above 1.2470. This morning, the USD remains on the defensive following improved performances by global stock markets. So long as risk appetite remains solid, the USD will struggle to surge further. Once again, it is also worth noting that a lot of news is already priced into the USD.

Rand and International FX Commentary

  • The USD corrected weaker yesterday in a move many would argue was long overdue. However, so long as the Fed threatened to lift rates and do so aggressively, the USD found the necessary support to power ahead, and a correction looked unlikely. After all, monetary policy disparities will only widen in the next two years, not narrow, or so the Fed would have us believe. The result has been a USD that climbed to its highest level in two decades. A lot has been priced in, and one could argue that the move is justified, especially now, when the UK and Europe are facing one of their toughest periods, dealing with a combination of high inflation, weak growth and major geopolitical risks.
  • Whether this is the start of a big correction in the USD remains to be seen. Investors have experienced mini USD corrections in recent weeks, only for the USD to find fresh support and power ahead to fresh multi-decadal highs in the days that followed. But there is a tremendous amount of Fed tightening baked into the price. There cannot be much more left to price in. Any remaining appreciation may be related to the USD’s safe-haven status rather than the pricing in of more tightening.
  • And the USD’s safe-haven status will be important. Stock markets are looking particularly vulnerable, and there are enough headwinds to ensure that earnings will be tougher to come by. The resumption of a stock market slide in the trading sessions ahead could drive the USD stronger. It is, therefore, difficult to turn too excited about the recovery in the ZAR, especially ahead of tomorrow’s all-important SARB decision, where it will hike by at least 25bp, but maybe more.
  • Given the Fed’s aggressive stance and the ZAR’s recent vulnerability, a 25bp hike may disappoint, and the ZAR could come under renewed pressure. A 50bp tightening is largely priced-in given the market consensus where 60% of economists are calling for a larger rate hike. The risks are asymmetric and favour a weaker ZAR, although so much will depend on the performance of the USD. Also of interest today will be the release of the latest inflation data for April and the retail sales for March. The former will be the main event, with the market anticipating another 5.9% inflation reading. Anything softer than this may negatively impact the ZAR if it strengthens the argument for a smaller rate hike. For context, core inflation remains comfortably below the SARB’s mid-point, and there are no demand-pull inflationary pressures for the SARB to fight.

Nicholas Kabaso

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