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Kwacha migrates higher

April 27, 2022by Nicholas Kabaso
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Local Market Commentary

  • President Hakainde Hichilema thanked China for agreeing to join other international creditors in efforts to restructure Zambia’s $17.3bn foreign debt. China is Zambia’s single largest creditor and was cited as stalling progress towards a debt restructuring deal with creditors, including the IMF. President Hichilema said that “you can’t build the economy with huge debt mountains, and we undertook a decision to dis-mantle this debt and create room to release resources towards debt servicing in the economy to create jobs and grow the economy.” Zambia reached a staff-level agreement in December 2021 for a $1.4bn three-year loan from the IMF. However, the government cannot access it before a creditors committee meets to chart a way forward. The progress with China is encouraging and suggests that Zambia is likely to conclude a deal with the IMF in the months ahead.
  •  Locally we have two sets of data to contend with today. The Trade Balance for March will be watched closely given the 6bn surplus recorded in February, investors will be especially interested in the March reading as this would capture all the disclocations in prices of base metals and energy which took place in the first half of March following Russia’s invasion of Ukraine. It is hoped that an additional surplus can be achieved as this would provide the currency with additional resilience at a time when the kwacha is experiencing better fiscal dynamics and a better outlook than it has for awhile.
  • When it comes to the inflation prints the picture is however not as rosy. Higher energy and food costs have played havoc with global inflation readings and Zambia is no different. Supply chain issues have added to the challenges and we do not expect these to fade anytime soon. We do however expect inflation to top out in the coming months when base factors start to play a role. 
  • Looking at the performance of base metals in the short term, investors will continue to take direction from developments in China surrounding the spread of the COVID-19 virus, and Beijing’s stance towards containing the outbreak. Some ¾ of the 22m Beijing residents lined up for COVID-19 tests yesterday which has sparked fears of a citywide lockdown like the one that has befallen Shanghai for the past month. Growth fears, coupled with supply chain issues are all being debated on base metal desks this morning and the outlook for the short term is not positive. 
  • 3m LME copper has slipped this morning registering losses of some 0.6% at the time of writing, 3m aluminium is currently off by 0.15% while Zinc is 0.16% lower on the day.
  • It has been an impressive performance by the USD in recent weeks, and that performance has simply accelerated this week. Any signs of difficulties across equity markets only serve to elevate the USD’s safe-haven status. One factor to consider is the retreat in U.S. Treasury yields. This might be an early indication that one of the drivers of the USD is starting to lose momentum as investors consider the possibility that global growth does not match expectations and that the central banks cannot lift rates as aggressively as they otherwise might’ve. The surge in the USD index translated into a dive in the EUR-USD below 1.0650, while against the GBP, the USD surged below 1.2600. Even the recovery in the JPY has been no match for the USD that strengthened against most of the majors.
  • Locally the USD-ZMW remains topside focused for now as a stronger dollar drives the price action. Investors expect a measured start given the global backdrop and local data releases

Rand and International FX Commentary

  • It has been an incessant phase of depreciation for the ZAR that one can safely say extends well beyond just the Barclays sales of ABSA flows. It coincides with a USD that has gone from strength to strength, another load shedding episode which may return as the grid remains heavily constrained, and the difficulties in global stock markets that are starting to price in higher degrees of risk. Furthermore, recent Covid data shows that SA is about to enter its next wave, although hospitalisations, thankfully, remain very low, while the full effects of the floods in KwaZulu-Natal are not yet fully understood. The USD’s safe-haven status is back in play, and investors appear to be turning slightly more conservative in how and where they invest.
  • Domestically, unions are looking to fight back against inflation by threatening to strike if Sibanye does not agree to its wage offer, again reaffirming the toxic relationship between labour and business in SA. At the same time, the government has adopted a tough stance on public sector wage negotiations, so SA may be about to enter an uncomfortable period of labour market unrest and difficulties that only make a difficult situation worse. Such are the effects of higher inflation on household disposable incomes.
  • USD-ZAR this morning has been able to consolidate above 15.8000 despite showing signs of a loss in momentum yesterday. Exporters are again being offered a great opportunity to cover some of their exposures forward at the best levels in nearly four months to offer some reprieve. Any help is welcome, with SA’s leading indicator data yesterday slipping slightly by 0.1% to confirm a difficult trading environment that shows few signs of improvement.
  • The re-introduction of load shedding and severe damage caused by the floods in KZN, impacting the flow of goods in and out of the Durban port, could result in exports being negatively affected. This, alongside tighter global financial conditions, will contribute to the decline in the leading indicator. It could also detract from SA’s export performance which must be considered when pricing the ZAR. Finally, the Russia-Ukraine war is also creating unfavourable external conditions, with supply-side challenges increasing, especially as China continues to pursue its Zero Covid policy and opts for more lockdowns. All that said, the ZAR has re-adjusted violently in the past ten days and will likely find a base soon off which to stabilise.

Nicholas Kabaso

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