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Local Market Commentary
- In some positive news for Zambian consumers, the Energy Regulation Board yesterday reduced gasoline prices by 6.2% to ZMW 19.84 per litre from ZMW 21.16. The diesel price was also reduced to ZMW 18.93 per litre from ZMW 21.15. According to ERB board chairperson Reynolds Bowa, the price review has been due to the decision to migrate to a monthly pricing cycle which entails that the local price of fuel is more responsive to the market fundamentals. Bowa added that international oil prices for petrol and diesel had recorded a notable decline in December, with Zambian Kwacha also appreciating against the USD. Note that price reviews for petroleum products are set to be carried out every month based on the outcome of the trend in the exchange rate and international oil prices in the month preceding the review, according to Bowa.
- In the base metals complex, copper closed yesterday’s session almost flat but aluminium took it on the chin shedding 2% on the day to close just ahead of $3000.00/tonne. This morning we have copper marginally bid with the 3m LME contract holding just ahead of $9530.00/tonne as we enter the EU session. A weaker dollar is currently underpinning the bullish tone but we still have all the PMI’s to clear today which will give further insight into the state of the manufacturing sector and thus the potential demand for the red metal.
- Note that trading volumes are thin in Asia with the Chinese out for their Lunar New Year celebrations.
- With the first month of 2022 having come to an end, it is worth taking stock of the performance of Southern African currencies. On a month-to-date basis, regional currencies were broadly stronger against the USD, with the exception of the Zambian Kwacha (ZMW). The South African Rand (ZAR), Botswana Pula (BWP), and Mozambiquan Metical (MZN) all chalked up gains against the USD. The ZAR (+3.58%) outperformed its peers underpinned by buoyant commodity prices that have bolstered SA’s trade and current accounts, SA’s mild 4th wave of the Omicron variant, and the ZAR’s undervaluation.
- Meanwhile, the ZMW (-7.92%) was the worst-performing currency in the Southern African region and among the 23 African currencies tracked by Bloomberg. The ZMW marked its worst monthly performance since March 2020 as demand for hard currency remained higher than actual inflows. The bearish bias on the ZMW is set to persist into this month amid a limited supply of hard currency.
- Wall St posted another stellar session overnight, unwinding more of the losses sustained earlier in the month. It was still a very poor month for equity markets. However, the bargain hunting that emerged prevented it from being much worse. The recovery now helps to ease risk aversion even more and will offer a boost to riskier, higher beta markets. It also means that the USD may come in for a deeper correction.
- The catalyst for the Wall St surge and the USD retreat were comments from Fed speakers yesterday afternoon that was slightly less inflexible on the monetary policy outlook than the FOMC statement alluded to. Although an end to Q.E. and a hike in March is still on the cards, what happens after that is less clear and will depend on a combination of economic data and the manner in which inflation unfolds. Any moderation in inflationary pressures could change expectations concerning the Fed’s anticipated rate hikes and the moderation of the Fed balance sheet.
- The USD is on the defensive once more, and all indications are that it could unwind most, if not all, of the gains it achieved following the FOMC decision and statement. A slightly more flexible Fed will see some of the hawkish edge priced back out of the market and investors revert back to original expectations. The USD was struggling to gain ground from an overvalued position in any event, and the less hawkish comments from the Fed yesterday proved to be the catalyst for a correction.
Rand and International FX Commentary
- Less than a week after a relatively hawkish FOMC statement, Fed speakers appear to be walking back some of that hawkishness and made the outlook for monetary policy and rates a little more data-dependent. Whether that be a response to the financial market volatility sparked or merely softer views within the Fed remain to be seen. However, the result was a retreat in the USD, the biggest in some three weeks as investors repositioned for a Fed that would not hike regardless. In a more indebted society, neutral rates, output gaps and inflation projections can change, especially if underlying monetary forces moderate.
- For the ZAR this was good news and helped it recover to levels approaching those seen before the Fed and SARB decisions. Readers should recall just how much of this news had been priced in ahead of these decisions. Had the market been given information that caused it to price in significantly more, it would have struggled to do so. The overnight USD-ZAR retreat is therefore justified and logical.
- It is also important to note that yesterday’s money supply growth softened to just 5.71% y/y for Dec while private sector credit extension growth rose 2.58%. In both cases, the growth in these money metrics is less than in inflation. There is simply no space in money supply growth to accommodate current inflation levels, which means that if certain sectors experience high degrees of inflation, others must experience deflation to offset. There could also be substitution effects that limit the degree of inflation pass-through. Although inflation is currently running high, headline inflation in some developed market economies is running even higher. It suggests that the purchasing power of the ZAR is being shielded and that the argument for significant ZAR weakness should be questioned.
- Slightly less positive, but ZAR supportive nonetheless was the moderation in the trade surplus to R30.1bn from the previous reading of R35.8bn. That was always to be expected when the economy opened up, consumption resumed, and companies once again looked to invest in their processes and infrastructure. However, while we expect the trade surplus to narrow, SA’s terms of trade and weak domestic demand should keep the surplus intact and assist the ZAR’s resilience at the margin. The overnight performance of the ZAR suggests that it could still enjoy some resilience in the coming weeks and months.