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Local Market Commentary
- In a study published on Friday by an alliance of local activist organizations and the Jubilee Debt Campaign U.K., Zambia’s creditors would have to take losses of about two-thirds if the country is to meet the International Monetary Fund’s (IMF) requirements for a debt restructuring. According to the study, Zambia has the capacity to repay about between $2.8bn and $3.5bn of debt over the next 14 years. About $7bn would have to be written off, implying a haircut of between 64% and 71% for private and bilateral lenders. Recall Zambia needs to secure an IMF economic program to complete a debt restructuring under the Group of 20’s Common Framework for debt treatment. According to the finance ministry, the country owes external lenders about $17bn, including liabilities of state-owned companies, with more than one-third of that owed to Chinese entities.
- In the local FX market, the Zambian Kwacha remained on the defensive on Friday amid a limited supply of hard currency. It was a week for the Kwacha bears, with the local unit recording its seventh straight weekly loss.
- Moving over to the U.S., it will be a quiet start to the trading week for the U.S., with the most important data scheduled for Thursday only. Thursday will see the latest inflation data released, and it will offer investors fresh perspective on how strongly the Fed will need to respond. Investors are anticipating a rise in inflation to 7.3% from 7.0%, near the top of the inflation cycle. Nevertheless, it is far enough from the 2% target that the Fed will need to hike several times this year. This is priced in. What is not is if the data surprises to the topside and prompts a further rise in U.S. Treasury yields.
- On the geopolitical front, tensions with Ukraine are running high. The U.S. has once again indicated that the threat of invasion is high and could happen any day now. This could amount to posturing to force Russia to continue denying it and back down, but this is unclear. As we have indicated before, there appears to be little upside to Russia invading Ukraine, sparking a war with NATO and attracting aggressive economic sanctions just as the economy is on the mend following Covid. At this stage, the core scenario remains where both sides are posturing ahead of a diplomatic solution.
- Friday’s non-farm payrolls data stopped the slide on the USD and triggered some profit-taking from many currencies that had recovered strongly against it through the past week. This week, all eyes will be on inflation, what pressure the data places on the Fed to act, and Wall St movements. Any rise in risk appetite will count against the USD, while the opposite is also true. For now, the USD has stabilised and shows no signs of adopting any strong directional momentum.
Rand and International FX Commentary
- Following last week’s non-farm payrolls data, which beat expectations, the USD stabilised and staged a mini-comeback. After what had been a very strong week for the ZAR, speculators banking on further ZAR appreciation threw in the towel. Stronger than anticipated jobs data raised the prospect of further USD gains to come, and the persisting with a short USD position when the USD was no longer weakening did not make sense. The USD-ZAR corrected higher and, in the process, unwound most of the ZAR gains achieved through the week.
- However, how the ZAR trades at the start of the new week will likely determine how it performs through the remainder of the week. A strong start will mean that the USD bears are back in control. Loadshedding was reduced to level one over the weekend before it was suspended on Sunday. Secondly, President Ramaphosa gains the opportunity to talk a big game and put a more positive spin on the reform narrative in this year’s State of the Nation Address (SONA). After all, SA has gained some approval for its efforts from offshore lenders, with the latest World Bank loan a clear example.
- Although this might be regarded as a risk factor, the probability of anything significantly negative being released is small. Perhaps the biggest criticism of the SONA is that it has promised much but delivered little. With every year of failed promises and missed opportunities, one could argue that the SONA systemically erodes Ramaphosa’s own credibility. After all, even the most patient electorate will eventually start to disregard the promises if the government is unable to deliver year after year.
- How this ultimately translates into the behaviour of the ZAR is unclear. On the one hand, market positioning is more neutral now that the ZAR sell-off took place on Friday, and there is room for USD sellers to resume their bets against the USD. Conversely, the USD has failed to surge stronger on the better than expected payrolls numbers, and investors will likely turn their attention to Wall St for some guidance. Resumption of stock market gains and a decline in the VIX could see the USD-ZAR fail to gain much more ground if any.