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The Kwacha remains on the defensive on a YTD basis

March 31, 2021by Nicholas Kabaso0
  • In a statement from Zambia’s Minister of Health Jonas Chanda, Zambia expects the delivery of coronavirus vaccines in April or May after ap-proving participation in the Covax initiative last week and is pursuing other means of procuring doses, including financed purchases. Zambia aims to inoculate about 3.7mn people using the Covax doses. According to Minister Chanda, “the first pillar under Covax will provide coverage for 20% of our eligible population, those aged 18 years and older while the other two pillars comprising vaccine diplomacy channels as well as government and private-sector financed acquisition will provide coverage for the remainder.” The announcement is likely to be well received as Zambia has lagged some of its Southern African peers in launching a vaccine programme.
  • Copper prices fell yesterday driven by thoughts of ample supply. LME stockpiles climbed by 8% to the highest levels since December 2020 bringing the total rise thus far over March to 87%. This does indicate that supply levels are adequate for now, however we are entering quarter two which is traditionally is a strong demand quarter when looking at historical performance so the longer-term outlook for copper remains bullish. 
  • In the short term we expect traders and investors alike to exercise caution given the uncertainty surrounding the European economic recov-ery. This may result in copper recording its first monthly loss in a year, which may well be a necessary clean out following the almost vertical gains achieved recently.
  • Emerging markets will be taking note of the strong Chinese official PMI number released this morning which has spurred risk appetite. Manu-facturing activity expanded at its quickest pace in three months after taking a brief hiatus for the Lunar New Year Celebrations. The March reading came in at 51.9 versus 50.6 in February beating analysts’ expectations who had pencilled in a rise of 51.00.  Its worth noting that export orders returned to growth which showed better foreign demand, however this may slow in the coming months given the uneven global eco-nomic recovery.
  • Geopolitically, the US has condemned China for moves aimed at further reducing political participation and representation in Hong Kong and has expressed deep concern about the delay in the LegCo elections. “We are deeply concerned by these changes to Hong Kong’s electoral sys-tem, which defy the will of people in Hong Kong and deny Hong Kongers a voice in their own governance,” a State Department spokesman said in an email. This will only serve to keep US-Sino tensions running high.
  • Following a softer-than-expected ADP employment change print in February, private sector hiring is expected to have picked up significantly in March. Consensus expectations are for a rise from 117k to 525k, which would coincide with the recent decline in initial jobless claims data. Nevertheless, the US labour market remains extremely loose, with the hope being that ongoing stimulus efforts will accelerate the tightening thereof in the coming quarters. Note that the market is becoming increasingly sensitive to labour market data, as the Fed has signalled time and time again that it will not consider monetary tightening until the US labour market is on a path towards full recovery. This data will un-doubtedly prime market expectations ahead of the next round of the non-farm payrolls numbers.
  • In the FX markets, strengthening US recovery hopes have bolstered sentiment towards the USD that is gaining momentum to the topside. The USD has now surged to the highest levels seen since Nov 2020 and could still test the highs seen in October. Weekly momentum is building and although the charts are overbought and screaming for a retreat, it does appear that the wholesale bearishness in the USD market has dissipat-ed. That will likely be reflected in a strong unwind of speculative USD long positions that have now largely been cleared out. Rising US bond yields are also supportive of the USD move as a strong H2 expansion in US economic activity takes hold.
  •  On a YTD basis, the Kwacha is the second-worst performing African currency against the USD, down by over 4%. Only the Ethiopian Birr (-5.48%) has fared worse than the Kwacha. A shortage of dollars amid rising expenditures on farming inputs, deteriorating fiscal dynamics and deeply negative real rates are some of the factors that have weighed on the local unit. While there are some factors supportive of the Kwacha going forward, risks exist that the local unit may not be able to fully capitalize as a deal with the IMF especially before elections may be difficult to reach. This, therefore, suggests that Zambia’s fiscal challenges could continue to detract from the Kwacha.

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Nicholas Kabaso

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