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Local Market Commentary
- Looking at developments on the African continent, the World Health Organisation (WHO) yesterday said that slow rollouts, rather than a lack of supply, are resulting in low vaccination rates across the continent. More than 340mn vaccine doses have been administered, with 10.1% of the population having had two doses. According to Bloomberg’s vaccine tracker, this compares with countries such as Brazil, Japan, Vietnam, Germany, the U.K., France, and Italy that have fully vaccinated more than 70% of their populations. WHO further said that the number of Africans being inoculated against Covid-19 needs to climb to 34mn people a week, from 6mn currently, if the least vaccinated continent is to reach the target of 70% of its people fully covered by mid-year. Low vaccine uptake undoubtedly poses a threat to the economic recovery prospects of the African continent, especially as new waves and variants emerge.
- Meanwhile, Ghana’s vice-president Mahamudu Bawumia on Thursday said that the Pan-African Payment and Settlement System is expected to save the continent billions of dollars in annual transaction costs and bolster shipments in the world’s largest free-trade zone. Bawumia added the system will facilitate intra-regional trade and payments by enabling the real-time transfer of funds from one African country to another. Traders have, until now, had to settle payments via U.S. and European banks, and the new system is expected to save the continent about $5bn in offshore clearance and transaction costs, according to its developer, the African Export-Import Bank.
- Shifting to the FX markets, the broader bearish bias seen on the Zambian Kwacha this week is expected to persist next week due to reawakening dollar demand from companies across all sectors as they return from the traditional festivity break.
- Moving over to the U.S., today will be a heavy data day that will offer more current perspective on the state of the economy on both the consumption and production side through the release of the advanced retail sales, industrial production and the Michigan sentiment data. The combination will likely shape monetary policy expectations for the week ahead. The previews follow.
- Consensus estimates suggest that retail sales dipped in December compared to November last year. However, risks are skewed to the topside for the sales numbers, given that consumer confidence levels remained fairly robust in December as the public shrugged off the Omicron worries. High-frequency data suggests that retail activity remained resilient, with cancelled holiday plans likely resulting in greater consumption of goods. The one factor to consider is vehicle sales, which make up a large portion of the data and will have been affected by the ongoing chip shortage. The headline figure should, therefore, be taken in context as details may show that spending was stronger than what it could initially portray.
- Industrial production in the United States rose 0.5% from a month earlier in Nov 2021, following an upwardly revised 1.7% growth in October and compared with market expectations of a 0.7% advance. Manufacturing output rose 0.7%, reaching its highest level since January 2019, driven by gains in the production of durable, nondurables, and other manufacturers such as logging and publishing. An advance in vehicle and parts production shows assembly lines took a step toward meeting strong demand. Mining output rose by 0.7% less than anticipated, while utility output decreased by 0.8%. Material shortages, weather events, and labour constraints have all weighed on production, but slowly we are seeing increasing capacity and steady hiring, which will keep supporting output.
- The USD remains under pressure, although downside momentum has slowed ahead of the slab of data scheduled for this afternoon. Although the Fed this week argued for a rate hike as soon as March once the taper was over and recently also added talk of a balance sheet roll-off, there was a lot already priced in, and a new catalyst is needed to drive fresh directional momentum on the USD. For now, the USD is unwinding its overvalued position, with one eye on the data today to guide the bias through the week ahead.
Rand and International FX Commentary
- Not much change to report back on with the ZAR still on the defensive, albeit off its worst levels vs the USD. There does not appear to be any local catalyst for the slight show of resilience other than perhaps some trimming of short USD positions after a relatively sizeable move earlier in the week. The USD, for its part, remains on the defensive, leaving the USD-ZAR vulnerable to a deeper correction through the rest of today and next week.
- Heading into the weekend and the Omicron wave continues to occupy headlines for all the wrong reasons. It has negatively impacted the US weekly jobless claims data, and scientists are still undecided whether Omicron will be the variant that turns the virus endemic. Some good news from the WHO is that it has approved two new Covid-19 treatments, which add to the arsenal of treatments that can be administered with some success.
- Against this virus backdrop, global stocks have come off the boil ahead of the weekend. That might be nothing more than some profit-taking after a relatively good week. There are still many unknowns, and investors prefer to trade cautiously. Furthermore, there is plenty of data out of the US this afternoon that could have market-moving potential, which will keep the USD bears at bay for much of today’s trading session.
- Key, will be what the data tells us about the underlying strength of the US economy. Whether it does indeed have the resilience to withstand tapering, rate hikes and a balance sheet roll-off this year in the way forecast by the Fed. or whether the Fed may need to scale back its expectations could determine how the USD trades. Given just how much has been priced in, the risk to the USD remains to the downside. It implies that the ZAR could continue enjoying a solid start to the year.