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Local Market Commentary
- Zambia’s Stanbic/PMI moved back into contractionary territory at the start of the year, pointing to a slight deterioration in private sector conditions. Specifically, the index fell to 49.9 in January from 51.5 in the month prior as the emergence of the omicron coronavirus variant weighed. New order growth softened while business activity and employment decreased. Meanwhile, there remained a lack of inflationary pressure, despite some signs of higher fuel prices adding to cost burdens. Encouragingly, hopes of improvements in business conditions and favorable government policies supported the 12-month outlook for activity.
- Copper inventory levels are in the spotlight again this morning and this is underpinning the price action in the Asian session. The benchmark 3m LME contract is currently 0.4% higher at $9872.50/oz into the open of the EU session, total copper inventories at LME approved warehouses now sit at 82 400 tonnes falling some 60% since the August highs.
- The draw in inventories correlates strongly with smelting activity, global smelting activity hit a 13 month peak in January with operations in China ramping up sharply ahead of the seasonal construction demand.
- Reuters reported – The number of inactive smelters fell to the lowest level since February 2018, according to a statement on Thursday from commodities broker Marex and SAVANT, a satellite analytics service it launched with Earth-i in 2019. “The strong start to the year in the SAVANT measures of copper smelting activity corroborate our own observations from the physical markets, which is an industry supply chain that is ramping up to meet strong downstream demand,” said Guy Wolf, Marex global head of analytics
- While U.S. firms have struggled with hiring and labour shortages in recent months, the emergence of the Omicron variant seemed to add to the pressure in the U.S. economy as 199k jobs were added according to December’s NFP print, a poor showing compared to the 450k expected. However, this temporary impact didn’t concern too many FOMC members as a drop in the unemployment rate, and wage growth signalled a continued recovery towards full employment in the wake of the COVID-19 pandemic.
- The January reading could incur another drop in hiring, as the impact of the Omicron variant is captured. Nevertheless, it is unlikely to sway hiring momentum, while the Fed’s recent policy statement noted substantial job gains and a satisfactorily tight labour market. With a swift rebound from Omicron, the Fed should stick to its recent policy guidance and begin hiking rates starting in March. The pace of monetary tightening after that will ultimately depend on inflation and the economy’s resilience.
- In the FX markets, a more hawkish tilt by both the ECB and the BoE have placed the USD on the defensive. It is now trading at weaker levels than ahead of last week’s FOMC decision and will soon be testing its recent lows in mid-Jan. Not even the retreat in equity markets was enough to put the brakes on the USD’s slide. This will go a long way to promoting higher risk currencies as well as commodity prices more broadly.
- Meanwhile, the Zambian Kwacha remain on the back foot amid a limited supply of hard currency. It has been a week for the Kwacha bears, with the local unit on course to record its seventh straight weekly loss.
Rand and International FX Commentary
- As bad as last week was for the ZAR, this week has been good and unwound more than half the losses sustained. Depending on the outcome of the non-farm payrolls data, further ZAR appreciation could be achieved today, although that would happen against a stock market that posted some losses yesterday and Asian markets that are generally in the red this morning. Notwithstanding the correction in stock markets, the USD is still on the defensive this morning with a solid offered tone.
- Key to the USD’s performance has been the ECB and BoE statements, which turned a little more hawkish than anticipated. It is no longer just the Fed that is looking to normalise, and some policy divergence that many expected was priced back out of the market. The BoE hiked rates by a further 25bp marking this the second consecutive rise, while the ECB kept its rates unchanged. However, both tilted their guidance more hawkish, which set the stage for the USD to retreat. The USD is now trading at weaker levels than before the FOMC and could well retest the lows recorded in Mid Jan.
- The ZAR has not been able to take full advantage mainly due to the resumption of load shedding, which many now acknowledge tends to impact the ZAR negatively. However, load shedding will be temporary and will last until Monday next week. Therefore, one should guard against taking a directional decision on ZAR based only on a temporary factor.
- With more significant risk events now out of the way, the focus will shift almost entirely to the non-farm payrolls data scheduled for today. The ADP data was soft and alluded to an Omicron impact. Although expectations for official non-farm payrolls have moderated with just a gain of 150k new jobs now anticipated, a soft reading may have the effect of keeping the USD on the defensive heading into the weekend and helping the ZAR close out the week below 15.20.