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Global focus rests on US inflation numbers

April 12, 2022by Nicholas Kabaso
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Local Market Commentary

  • The Charity Jubilee Debt Campaign has called on BlackRock to delay demands for debt interest payments from Zambia to prevent the country’s finances from spiralling out of control. BlackRock, the world’s largest fund manager with $10trn assets under management, was among the private-sector lenders that have refused to reduce the interest rate or delay payments on Zambian bonds, unlike governments and international agencies that hold the country’s debts.
  • According to the Charity Jubilee Debt Campaign, BlackRock holds roughly $220mn of Zambian sovereign bonds. If the debts were paid in full, it could generate $180mn for clients, mostly in its index-linked exchange-traded funds. “That would represent a 110% profit on what we estimate the fund manager paid”, said the Charity.
  • Of Zambia’s external debt, 46% is owed to private lenders, 22% to China, 8% to other governments, and 18% to multilateral institutions. The Charity also noted that China is among the government lenders to agree to a longer debt repayment schedule that private lenders, including banks, have so far resisted. Restructuring talks are set to begin later this month, and Fitch has warned that disagreements among official creditors or prolonged negotiations with private lenders could delay an eventual restructuring deal and IMF approval into the second half of this year or even into 2023.
  • In the base metals complex, as the week unfolds the drivers of base metals remain the same. A stronger dollar coupled with concerns over Chinese demand given the COVID-19 lockdown’s are weighing on sentiment capping any potential major recovery in prices in the Asian session following yesterday’s losses. 
  • Moving over to the US, today’s release of the CPI data will be key as it will help investors confirm whether or not their current positioning for prospective Fed rate hikes and quantitative tightening is realistic. Consensus expectations as per Bloomberg surveys are for inflation in the US to have accelerated further to 8.4% y/y in March, as the fallout from the Russia-Ukraine war compounded existing price pressures. The print holds some market-moving potential at the start of the shortened trading week, but given just how much in the way of prospective Fed tightening is already baked in, this may be limited.
  • The USD continues to hold its own and trade at some of its most buoyant levels since Q2 2020. It has enjoyed an impressive run since Q2 2021. Much of that has to do with the economy’s performance and the Fed’s commitment to adopting a much more conservative monetary policy. Investors are still looking through the current spike in inflation and focusing on the prospect that inflation will be brought back under control through the higher interest rates. UST yields continue to march higher, but it has been the longer-end of the U.S. yield curve that has underperformed to unwind some of the recent flattening and the brief curve inversion. Against the EUR, the USD is still trading firm and keeping the pair below 1.0900. The GBP, on the other hand, has remained on the defensive to keep the pair closer to 1.3000.


Rand and International FX Commentary

  • It was often the case that an announcement of load shedding would be bad news for the ZAR. Given its impact on the country’s productive industries, the ZAR would depreciate on such announcements. However, yesterday’s announcement did little to the ZAR, which ignored the news and continued to trade below the 14.60 mark throughout the afternoon. Overnight, Eskom announced that load shedding would be on pause, so this is no longer a reason to turn bearish on ZAR, but the point still stands that the ZAR remained resilient despite the announcement. It has gained resilience from a multitude of other sources.
  • Furthermore, the USD gained almost 5% since early Feb, and yet the ZAR appreciated from levels around 15.30 down to 14.55 over that time. It has been a very impressive performance through an extremely tumultuous geopolitical time when stock markets have shown their vulnerability. Clearly, the ZAR responded to a different set of real economy flows that manifested, both through the pandemic and during the war.
  • Analysis of the CFTC data also shows that the speculative element within the market has sought exposure to the ZAR. It has become a proxy for commodity exposure within the FX market. While commodity prices remain elevated, the ZAR may extend its gains, despite its current overvalued position. Concerns over fiscal sustainability have faded to the background, especially since Moody’s upgraded SA’s outlook, while SA’s interest rates are still offering some yield attraction as the SARB embarks on a predictable and credible tightening in monetary policy.
  • For now, the stars have aligned for a phase of ZAR appreciation to unfold. It should be considered cyclical, and the cycle will likely last for as long as commodity prices remain buoyant and SA enjoys both an interest rate and inflation advantage over its major trading partners. For the ZAR, this is a fundamentally different trading environment, and its performance reflects that. Notwithstanding the weakness in global stock markets, a retest of the recent lows below 14.5000 still looks possible, while many ETM indicators confirm that the balance of risks remain supportive of ZAR.

Nicholas Kabaso

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