Local Market Commentary
- It is a quiet start to the week, and hence attention may fall on President Hichilema’s overseas trip. While on his trip to the United States of America for the 76th Session of the United Nations General Assembly, President Hakainde Hichilema is set to meet with the Heads of the International Monetary Fund and the World Bank on the sidelines. The president is also set to engage prominent and influential con-gressmen and women as well as Senators of Capitol Hill to share Zambia’s vision under the new leadership.
- Moving over to copper it’s a case of a strong dollar hitting the price of the red metal today. 3M LME copper is currently down just over 2% at $9112.00/tonne as we head into the start of the EU trading session. The next major support level comes in at the prior low of $9058.50/tonne.
- It will be a quiet start to the week with Japan and China on holiday, but it will not be a quiet week with a trio of key central banks an-nouncing their decisions. The BoE, the BoJ and the Fed will all be offering fresh perspectives on the outlook for their respective econo-mies and offer guidance on their policy stance. Of the three, it will naturally be the Fed that will take centre stage, with investors seeking insight over the timing of any monetary policy normalisation through the taper.
- Treasury Secretary Yellen again pleaded with Congress to overcome their party-political differences and raise the debt ceiling on the fiscal front. The Republicans stand firm in their reluctance to do so as a means of protesting the planned spending on infrastructure which the Democrats wish to undertake. Republican leader McConnell reiterated that the Democrats had the majority in both houses of Congress and therefore did not need the Republicans’ support. However it gets passed, Yellen reiterated the damage that would be done to the U.S. economy if a default were allowed to unfold. As always, this will likely go down to the wire, but it is highly improbable that Congress will allow any form of default event to take place.
- U.S. medical advisor to the president Dr Fauci on the pandemic indicated that data needed to determine the advisability of booster shots from Moderna and J&J shots is just weeks away. At this point, it remains unclear whether booster shots are even necessary, other than for the heavily immuno-compromised. On the vaccination of children, the data will become available towards the end of the month.
- Ahead of the FOMC decision, the USD is on the front foot. However, the reasons may not be related to the Fed’s taper timeline. On the contrary, it is related to some of the heavy losses sustained in Asian markets this morning. Rising expectations that China’s Evergrande could lead to domino effects on other developers have spooked investors that have rotated away from stocks. Risk aversion has risen, and investors in riskier asset classes will lighten up on their exposure in favour of USD assets. Meanwhile, the Zambia Kwacha is likely to remain largely stable this week on the back of improving investor sentiment.
Rand and International FX Commentary
- After running into topside resistance at its 50-day and 200-day moving average at the end of last week, the USDZAR initially looked set to end the week slightly less buoyant than it was in the preceding days. However, late Friday afternoon selling pressure saw the ZAR trade weaker against the USD, ending the day 0.90% down at 14.7200/$. With that being its fourth consecutive daily decline, the local unit se-cured a 3.50% loss over the course of last week. While riskier assets and emerging market currencies struggled broadly against a rebound-ing US dollar, the ZAR led the underperformance by some margin. The next worst currency performer was the similarly volatile Turkish Li-ra, which sank 2% over the same period.
- The week ahead promises to be no less volatile than the last, with a US central bank policy decision as well as a domestic policy update from the SARB. While these will likely be the source of near term volatility in FX markets, markets will be wary of overstretching moves in the run-up to these events. Having said that, the USD has remained on the front foot over the weekend into morning trade today after surging into the end of last week. However, risks for the USD remain with the Fed holding its dovish stance. Given August’s weaker hiring and softer inflation data last week, the Fed could hold back on any taper discussions and rather see fit to push these out to the November meeting. Should this be the case, the dollar will have few tailwinds in the near term to sustain a bull run.
- Domestically, markets will be gearing up for the SARB’s policy decision. Given the disruptions to Q3 economic performance, in the form of tightened lockdown restrictions and civil unrest, the SARB will have ample justification in holding off on any rate hikes. However, this was already largely expected, with limited rate hike potential anticipated through to the end of the year. Of more importance will be the cen-tral bank’s growth and inflation outlook, as these will provide an indication of when rate hikes could commence. On that front, in its Glob-al Economic Outlook released Friday, ratings agency Fitch raised SA’s 2021 economic growth forecast to 5.3% from 4.9% previously, follow-ing rebased GDP data showed that average output was higher through end-2020 to early 2021. While Fitch upgraded its growth forecast for 2021, it is worth noting that risks to the growth outlook remain tilted to the downside in South Africa.
- Ahead of the SARB’s policy decision, domestic markets will also be anticipating August’s CPI release due Wednesday. In the meantime, the ZAR is likely to remain sensitive to broader market momentum, which has already been the case in early morning trade. While thinned liquidity has seen limited potential for a return of risk appetite, with Chinese and Japanese markets shut for holidays, the ZAR has continued to lead losses at the start of the week. The USD, meanwhile, should remain supported ahead of the Fed’s policy update, sug-gesting the ZAR will have little upside in store in the near term.