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- On the regional front, SADC in a statement yesterday said that member countries had had agreed to extend a military deployment in Mozambique to help put down an Islamic State-affiliated insurgency that’s killed thousands of people and delayed a $20bn natural-gas project. The heads of state extended the mission’s mandate “with associated budgetary implications” and will “continue to monitor the situation going forwards,” according to a communique issued by the bloc after the meeting ended. It didn’t say how long the latest extension would last. Note, there has been significant progress in containing the insurgency since the deployment of Rwandan soldiers, followed by the SADC troops.
- Meanwhile, data from the Bank of Zambia showed that gross reserves in October fell to $2.6bn from $2.91 in the month prior. Donor inflows also fell to $5.71mn from $53.1mn in September. Meanwhile, M3 money supply growth accelerated to 9.39% y/y in November from 8.94% in October. On a month-on-month basis, M3 money supply rose 1.79%.
- The LME 3-month rolling forward price of copper rallied sharply yesterday, up to $10,064/MT which marks a 6.3% gain from January’s lows when looking at Bloomberg data. This is also the highest the metal’s price has been since October. Some in the market are calling for a record high this year, as supplies dwindle, the USD weakens, and production demand remains relatively stable. This suggests that a break north of $10,460/MT would need to take place. LME physical holdings have been squeezed to their lowest levels since 2006 at less than 0.2 million tons, less than half of what was available in April 2020. At the same time, copper miners appear to be running into production constraints, which could exacerbate the shortage and raise the scarcity premium on the metal. A softening Chinese demand outlook could moderate upside potential to some degree, but many question marks remain over whether regulators will see wisdom in tightening production restrictions amid a fragile growth environment.
- In the U.S., it will be a quiet data day today, with only PPI scheduled for release. However, its importance is diluted by yesterday’s CPI release, which rose to a 40yr high and further strengthened the argument for the Fed to tighten monetary policy. However, while the argument is strengthened, it changes little concerning the outlook for inflation and the anticipated trajectory. As high as inflation is at the moment, it is also nearing its peak, and investors would do well to start looking through the current spike in inflation, which will prove temporary in the end.
- The major data day will be tomorrow, and so today will likely be consolidative as investors digest the implications of yesterday’s inflation data and the comments by the Fed. Although tomorrow’s data will be important in determining how the USD trades through next week, there will be a reluctance to take on any significant position into the weekend. Nonetheless, any disappointment will set the stage for further depreciation in the USD, especially if improved news on the Omicron spread is released over the weekend.
- Of great importance through the weeks ahead will be the performance of companies in the real economy. Earnings will be released, and there is a lot at stake given just how much good economic news has been priced into global stock markets. The probability is high that earnings will hold up well. However, it is key whether they impress to the point where they justify lofty valuations. The risk is that investors are expecting too much, despite the positive trajectory Wall St is enjoying.
- In the currency markets, after trading in a tight range at highly overvalued levels for a couple of months, the dollar index broke through key support levels yesterday as the floodgates opened and its correction deepened. This occurred despite a high CPI print, reflecting just how much in the way of aggressive monetary tightening expectations were priced in prior to this week’s slide. It’s counter-cyclical characteristics are starting to show as the market prepares for a Fed tightening cycle that may be less damaging to global economic growth than previously anticipated. While the USD is nursing losses this morning, its broader momentum remains to the downside.
- Meanwhile, Zambian Kwacha bears remain in control at present as the local unit continues to weaken on the back of a tight supply of dollars.
Rand and International FX Commentary
- One got a sense of just how overvalued the USD is. Using historical comparison, the USD is some 15-20% overvalued on a trade-weighted basis. Given just how much monetary tightening has been priced in, investors need to question how much more is justified on current information. Furthermore, Omicron may be causing havoc at the moment. Still, at the rate, it is sweeping through the global population, it is also building high levels of immunity in vaccinated and unvaccinated alike.
- Furthermore, as investors position for a less risky financial market environment in the future, the need for a safe-haven destination has weakened considerably. The USD could still lose more of its appeal through the weeks ahead if the fourth wave of Omicron peaks and a more stable business environment follows. The current hope and building expectation is that the current rapid spread of Omicron together with its lower virulence, will render it endemic.
- Stock markets had a much better day yesterday, and overall risk appetite has improved considerably. The USD has succumbed and broken down through key support, beginning what looks like a much deeper correction. Nothing in the inflation data yesterday or Fed Chairman Powell’s comments this week have changed expectations much, and the USD is, therefore, left vulnerable to its overvalued position.
- Domestically, there does not appear much that could derail this move. In fact, the defence of the judiciary and constitution by acting Chief Justice Zondo yesterday would help rather than detract from the appeal of the ZAR. Then there is also the recent rapid rise in commodity prices as reflected in the CRB indices, and the ZAR’s terms of trade will have recovered to help support the trade, and current accounts remain comfortably in surplus. At the start of 2022, the ZAR looks set to surprise many with its degree of resilience.