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Zambia Kwacha expected to remain on the back foot

February 14, 2022by Nicholas Kabaso
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  • Minister of Commerce, Trade and Industry Chipoka Mulenga has noted that the government intends to reduce the number of licences needed when registering a company. According to Mulenga, the bureaucracy involved in registering a company has been a major deterrent to most foreign companies wanting to invest in the country. The reduction in the number of licenses will make it easier and more attractive for foreign companies to set up their businesses.  
  • Base metals witnessed strong losses into the close of the week as investors took profits after the strong run to the topside. Threats of tighter monetary policy and weaker economic growth as a result relegated the bulls to the sidelines with the likes of copper shedding 3.91%, while aluminium finished the session down 3.57% on the day.  
  • This morning there is evidence of bargain hunting in Asia as the metals counters right themselves following Friday’s fall. Aluminium is around 2.3% higher on the day marking time at $3210.00/tonne as the EU opens with the conflict over the Ukraine front and centre. The threat of sanctions against Russia should they invade the Ukraine has given rise to fears of higher energy costs as Russia get locked out and the Nat gas market becomes tighter than it already is. This will lead to further mothballing of aluminium production capacity as it becomes unviable to smelt given the high input costs. Aluminium production takes an incredible amount  of electricity to produce, and we have already seen extensive capacity in both the EU and China go offline due to the higher energy costs.
  • Despite this week’s treasury bond auction, the ZMW is expected to remain under pressure as corporate demand continues to grow on the back of improving economic activity amid tight hard currency supply. 
  • Moving over to the U.S., there is much to talk about, and the main focus will be on the standoff in Ukraine between Russia and NATO allies. The U.S. is ensuring it keeps the propaganda pressure on Russia by highlighting that it would not be surprising if Russia engineered a reason to “retaliate.” Russia, for its part, continues to state that it has no intention of invading Ukraine but that it has a right to defend its border. The standoff holds the potential to trigger a bigger sell-off in equity markets that will complicate the Fed’s decision making.
  • The other focal point this week will concern Fed speakers such as James Bullard, who just last week said that he expects rates to be 100bp higher by June, implying a possible 50bp rate hike at some point, possibly as early as March. Bullard’s comments caused some concern in financial markets. They raised the spectre of some serious financial market corrections that will be unhelpful when consumer sentiment has slipped to a more than ten-year low in early Feb.
  • The USD has regained a firmer footing amid a wobble on global equity markets on Friday, a wobbly open in Asia and comments by James Bullard on the outlook for U.S. interest rates. Add to that the rise in geopolitical risk and the implications for emerging markets, and the USD has enjoyed a more bid tone. The difficulty in backing the USD wholesale is the waning support for it reflected in the CFTC data, the enormous trade and budget deficits that render the USD less resilient, its overvaluation and the recent surge in inflation. One would only back the USD in these circumstances on significant financial market volatility expectations.

Rand and International FX Commentary

  • After promising to end the week on a firmer footing, the ZAR backtracked and lost ground. As Wall St trades at the moment, so goes the ZAR, and given the selling that unfolded on Friday, fears of a major correction triggered some profit-taking, especially out of EM currencies, including the ZAR. This week will start, in much the same fashion, with all eyes on Wall St and how it trades.
  • Also of interest this week will be the domestic inflation data. Consensus anticipates a decline in inflation to 5.7% from 5.9% ensuring inflation remains within the target band for a little longer. The final arbiter on whether this will remain the case will be the ZAR price of oil. Regular readers will know that the outlook for domestic inflation is a factor to consider when searching for longer-term guidance on the ZAR and stands as a barometer for the kind of price stability that should reflect in the ZAR over time. For now, domestic inflation remains well below that of the US and suggests that the ZAR’s resilience is, therefore, somewhat justified.
  • Also on the ZAR’s radar, but unlikely to be market-moving, will be the President’s Q&A session in parliament. Ramaphosa is likely to face some tough questioning concerning the recent SONA, although history tells us that this is not a big risk event for the market, implying that beyond the inflation reading, the bulk of the focus will rest with offshore developments.
  • The Standoff on Ukraine’s border is one factor that holds the potential to rock markets, just as US earnings and some of this week’s data do if they change expectations on US interest rates. For now, it remains challenging to pick clear direction on currency markets and the USD, with many cross-winds blowing. Directional momentum is weak, and the consequences of a transition from an ultra-accommodative monetary policy world to a more normalised world holds much risk for asset prices as central banks remove one of the key drivers of equity markets.

Nicholas Kabaso

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