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SA backs idea of a single African currency

March 10, 2022by Nicholas Kabaso
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Local Market Commentary

  • A quiet data card in Zambia saw focus rest on regional and international developments. While we are of the view that it is unlikely to materialise in the short to medium term given all the regional dislocations that would first need to be ironed out, South Africa’s International Relations and Cooperation Minister Naledi Pandor said that the government fully supports the idea of a single African currency backed by the continental central bank and monetary institute. Pandor noted that the establishment of the African Union’s African Central Bank, African Investment Bank and the African Monetary Institute are considered critical to facilitate a single currency and boost the intra-Africa trade.
  • Minister Pandor said that SA has consistently shown that it is committed to supporting the continental integration to assist the AU member states in overcoming trade barriers that impede the flow of goods, services, and capital. The Minister added that the operationalisation of the African Continental Free Trade Area Agreement is key for long-term continental prosperity and integration. While Covid is partly to blame, recall that the AfCFTRA was delayed due to several regional issues that needed to be resolved. 
  • We expect similar delays to occur in the rolling out of the African Union’s financial institutions, which comprise of the African Central Bank, African Investment Bank and the African Monetary Institute. Minister Pandor noted that SA is committed to working with its African Union partners to finalise the negotiations on all the outstanding technical issues, particularly the macroeconomic convergence criteria, which remains a hurdle in the early operationalisation of the African Union’s financial institutions.
  • Base metals retreated as hopes for an end to the Ukrainian war rose following the announcement of planned diplomatic talks between Russia and the Ukraine. Equally there were concerns that the fate of halted trading in nickel could befall other metals counters and thus overbought metals thus found willing sellers throughout much of the session. Aluminium finished the session 4.59% down at $3341/tonne, copper closed just ahead of the $10000/tonne mark after shedding 2.05% while zinc closed 4.84% down at $3940/tonne. The LME does not anticipate bringing nickel trading back on line before tomorrow.
  • This morning we have recovery underway in the Asian session, aluminium is up by around 1.3%, while copper is trading 1.12% higher as the EU open beckons. Volatility is a factor which will underpin trading conditions for the foreseeable future.
  • The Zambian Kwacha closed on the back foot on Wednesday, keeping the broader bearish bias intact and dollar liquidity challenges continued to weigh.
  • Moving over to the U.S., It was a busy day in Congress yesterday with the US House of Representatives voting quickly to rush $13.6bn worth of aid to Ukraine as it continues to struggle against Russia’s invasion. Furthermore, it passed another $1.5trln package to avoid a government shutdown all the way through to the end of Sep and imposed the ban on Russian oil, gas and all other energy, while it also indicated that it had made progress in securing higher oil production from other sources. The combination helped the oil price collapse 12% yesterday.
  • Any reduction in risk aversion will detract from the attraction of the USD. Such was the case yesterday with the USD unwinding roughly one-third of its war-time gains in just one trading session. There is likely to be more of that if there are any further constructive developments in the talks between Ukraine and Russia although most investors are justifiably sceptical. Russia needs to show that it secured something for all the destruction to Ukraine and its economy that this war has caused, but Ukraine will see no reason to politically massage the situation to Russia’s advantage, and will be unwilling to accede to any Russian demands.

Rand and International FX Commentary

  • The ZAR is well-positioned to appreciate the minute the news flow out of Ukraine turns more psitive. The War has forced the West to impose sanctions on Russia, while it has destroyed some of Ukraine’s manufacturing and trade capacity to deliver the minerals and grains it used to supply to the world. That capacity will not come back on stream immediately, even if the War were to end tomorrow. It implies that even if geopolitical risk were to improve dramatically and prices of their exports retreated, they would likely still be supportive of the ZAR.
  • That was highlighted yesterday when the ZAR appreciated enormously on news that Ukraine and Russia’s foreign ministers would meet in Turkey. This is the highest-level meeting and the first between the two since Russia invaded Ukraine two weeks ago. Although Ukraine has made it clear that the only solution was for Russia to capitulate, financial markets cheered the news that Ukraine was prepared to enter talks in a bid to restore peace. 
  • US equity markets surged, overall risk aversion measures retreated, the USD collapsed, and emerging market currencies could take advantage. Even oil retreated sharply and was at one point 12% down on the trading session to improve overall sentiment significantly. It was a feel-good day that will ensure that all eyes turn to Turkey for the outcome of such talks. Such has been the volatility in financial markets that just about any improvement will be welcomed. So desperate are investors for good news that they chose not to respond to the devastating news out of Mariupol, where a hospital and its maternity ward were destroyed.
  • Of further interest today will be the emergency EU summit, where a sizeable joint bond could be issued to help fund defence and energy projects. Indirectly, this will also help to support the economy. At the same time, the ECB may well seek to delay their rate hikes in a bid to keep economic growth prospects alive against a backdrop of an enormous hit to confidence and trade. All that may unwind if the talks between Russia and Ukraine fail and deliver nothing, but for now, investors are looking for the kind of good news that would catalyse a strong rotation back into risk assets.

Nicholas Kabaso

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