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Local Market Commentary
- The Bank of Zambia (BoZ) yesterday raised its key lending rate by 50bps to 9.0% to help bring down stubbornly high inflation, with consumer prices only seen as falling back within the bank’s target range in 2023. BoZ Governor Denny Kalyalya said that inflation remains elevated de-spite showing signs of slowing down, and that hike, the first since February, was aimed at bringing inflation back to target but also took into ac-count the need to continue supporting the economy and maintaining financial stability. Inflation in Zambia is expected to average 15.0% next year and 9.3% in the first three quarters of 2023. Kalyalya also said that the BoZ also took into account into account negative real Treasury-bill rates in its decision to tighten monetary policy. Yields on benchmark one-year Treasury bills have more than halved to 12% this month from 25.8% in January.
- On the growth front, the BoZ forecast the economy to expand by 3.3% this year and by 3.5% and 3.7% in 2022 and 2023, respectively. The BoZ also urged the government to implement fiscal reforms to complement an objective for low and stable inflation. The increase adds to a half-a-percentage point hike in February and further reverses some of the 350bps of cuts announced last year to shore up the economy from a coro-navirus-induced slump. Furthermore, the hike signifies that the BoZ is moving tame inflation even as the economy is expanding at a slower than expected pace.
- Inflation and trade data will hold domestic focus in the session ahead. Risks to the BoZ inflation outlook include the possible increase in fuel pump prices and electricity tariffs necessary to restore fiscal sustainability, as well as the predicted fourth wave of COVID-19, which could dis-rupt supply chains and trigger price increases. The expected further decline in maize prices arising from the 2020/2021 bumper harvest and the forecasted normal to above-normal rainfall during the 2021/2022 farming season could lower inflation in the short-term.
- In the base metals complex, the price of copper applauded the data out of the United States yesterday as it pointed to strong economic dy-namism which would support the demand side of the equation. Equally there was news that the world’s top consumer China announced measures to support its property sector which provided additional support. The benchmark 3m LME copper price finished yesterday’s session at $9835.00/tonne, up by some 1.27% on the day. This morning we have the market trading flat in Asia with many traders choosing to remain out given the absence of the Americans today.
- As the U.S. enjoys its Thanksgiving long weekend, it is worth touching on some of the data released yesterday. In aggregate, the data alluded to an improving economy, with the standout data being the initial jobless claims that came in well below expectations to help drag continuing claims down as well. The data points to a tightening labour market, which we would expect to see at this stage of the recovery.
- Core PCE met expectations at 4.5%, although that remains more than double the Fed’s target and will raise some eyebrows. It should also be looked at together with the GDP deflator that accompanied the second GDP estimate, that implied inflation of 5.9%. Both measures point to an inflation episode that is uncomfortably high for the Fed and will force the FOMC board to respond with monetary tightening through 2022.
- On that point, the FOMC minutes released last night showed that an increasing number of FOMC members are open to the idea of speeding up the taper and or bringing forward the timing of any rate hikes. There is growing concern that the current bout of inflation has become more persistent and will shift inflation expectations higher. If anything, the minutes only heighten the prospect of widening monetary policy differ-entials between the Fed and its major trading partners to lend more support to the USD.
- One might expect the USD to take a breather over the next two trading sessions. But there really is no obvious reason why it should retreat to any significant extent given the recently released data and the FOMC minutes, which only raised the probability that the Fed would tighten monetary policy more quickly than first anticipated. Furthermore, the Covid infections in Europe continue to rise to fresh records, which will detract from the EUR’s performance and lend further substance to the rotation back towards the USD. Therefore, any retreat in the coming days might be little more than a fresh opportunity to buy USDs until the monetary policy divergence between the Fed and the ECB is fully priced in.
Rand and International FX Commentary
- As we head into the US Thanksgiving long weekend, the USD remains firmly on the front foot after another strong trading session yes-terday, although it is trading off yesterday’s highs this morning. There is no data scheduled for today, but what was released yesterday was strong and reflected a US economy that is not only expanding robustly but that could easily withstand further monetary policy nor-malisation. In fact, the data was so strong, that some in the market have begun to speculate on whether the Fed could even bring for-ward the timing of rate hikes once the taper ends.
- The next big international event will be Black Friday and the strength of sales. With so much pent up demand and savings that many households can unleash, this festive season could be a very buoyant one, although there may be a stronger shift to online sales given the unresolved pandemic and the risk of a fourth wave unfolding in the US as well.
- USD appreciation of this magnitude typically induces some volatility into currency markets. It is not surprising that some of this is re-flected in the USD-ZAR that found itself staring at the 16.00 handle through yesterday’s trade. However, this is not a ZAR story so much as it is a USD story. Most currencies are on the back foot vs the USD, with those that carry inherently higher levels of risk, proportion-ately more affected. The ZAR is one such currency, although it is important to note that the ZAR is roughly mid-table on the performance stats for the year-to-date.
- Domestically, the one factor that could further impact the performance of the ZAR will be the gradual emergence of the fourth wave in Gauteng and the risk that the authorities start to lock down again given the relatively low take-up of the vaccine. Currencies faced with the prospect of locking down or stricter restrictions have depreciated, and there is no reason to believe that the ZAR might be any dif-ferent. Therefore, the ZAR remains vulnerable for the time being, and although the last two trading sessions could generate a slight cor-rection, a full-blown ZAR recovery may need to wait a little longer.