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- It was a quiet start to the week in Zambia amid a dearth of domestic data yesterday. Note the Bank of Zambia is set to deliver its verdict on its policy rate tomorrow, and Friday will see the release of the latest edition of the Markit/Stanbic Bank PMI. While inflation slowed down in July, it has remained above the Bank of Zambia’s upper limit of 8% for more than two months now. That said, the ZMW’s appre-ciation should further help cool inflation. A sustained slowdown in inflation could ease the pressure on the BoZ to raise the policy rate.
- At its latest auction, Zambia attracted bids for more than eight times the amount of domestic-currency bonds offered, with yields plung-ing as investors bet on an economic recovery under the new leadership of President Hichilema. The Bank of Zambia on Friday raised ZMW 2.5bn ($157mn), having bids for a record ZMW 12.5bn. Yields broadly declined across the curve, with those on the 5-year tenor dropping by almost 8ppts to 25.0%. Although the yield does not offer much real return, given inflation is at 24.4%, the notable rally on the Zambia Kwacha could signal that consumer-price growth will ease in the coming months and potentially improve the real rate of return.
- Moving over to the US, after two decades of military occupation, the U.S. ended its chaotic withdrawal from Afghanistan to the cheer of the Taliban, who have now claimed “complete independence”. The Biden administration did itself no favours given how this was handled and will count heavily against the Democrats in the next elections. It was a misstep with consequences not just in the region but also in in-ternational and U.S. politics. The Taliban now appears to be stronger than ever, and the more extreme Islamic presence in the region will be something the West will want to keep a close eye on, especially if it allows ISIS to rebuild a stronghold.
- With this exit now behind us, the focus will shift to the economy and the data scheduled for release. In the wake of the housing data yes-terday, which disappointed, the Case Shiller house price index will be released today. There has been a steady rise in house prices over the past year, and although that is good news from a household balance sheet perspective, it detracts from affordability. It is another var-iable the Fed will need to consider when assessing all the distortions that may arise thanks to their ultra-loose monetary policy. Although the housing market has not been described as unsustainable, further price increases along this trend hold the potential to destabilise the market.
- After a big improvement in consumer confidence through most of 2021, some concerns have emerged in recent weeks that the recent resurgence in COVID-19 cases in the U.S. might weigh on consumer sentiment and delay the U.S.’s economic recovery. These concerns are well reflected in the market’s consensus expectation for the August print of the Conference Board’s consumer confidence index, which points to a 6.1-point decline from 129.1 to 123.0. For the most part, however, the latest wave of the pandemic is unlikely to derail the U.S. economic recovery in any material manner, meaning consumer confidence should remain buoyed in the months ahead.
- Throughout thinned out trade yesterday with the U.K. on holiday, the USD remained on the defensive, dipping to the weakest levels in nearly three weeks on a trade-weighted basis. Although there is some apprehension ahead of the next key event, which is the U.S. jobs data on Friday, sentiment remains slightly bearish with investors still digesting Fed Chairman Powell’s comments from Friday that ap-peared to be more sensitive to dovish considerations than had been anticipated.
Rand and International FX Commentary
- The ZAR strengthened for a sixth consecutive day yesterday, as it continued to capitalise on upbeat global market sentiment, with the latest boost being cautious Fedspeak from Chairman Jerome Powell at last week’s Jackson Hole symposium. The USD remained broadly pressured alongside other haven currencies, namely the Japanese yen and Swiss Franc, which were harder hit as buoyant global equity markets kick-started the week on the front foot for risk assets. This largely followed through for the rest of the day, with emerging mar-ket currencies following suit and taking advantage of a persistently pressured US dollar.
- With another 0.60% gain yesterday and having appreciated roughly 4.50% from a 15.4000/$-low hit just over a week ago, the ZAR is now set to end August almost flat at the 14.6400/$-handle. The ZAR’s appreciation over the past week has primarily been off the back of dollar weakness as investors once again gauge the Fed’s likely tapering timeline. However, on the domestic front, there has been little to cheer over. Yesterday’s release of government budget data showed the monthly budget balance slipped to a hefty deficit in July from a record surplus in the month prior. Specifically, the government’s monthly budget balance fell to -R133.2 billion from R63.1 billion, marking the largest deficit in a year. This comes as fiscal dynamics continue to be pressured by expenditure far exceeding revenue. While year-to-date public finances are in a stronger position than last year’s due to less stringent virus containment measures and greater mining revenues, this will unlikely offset pressures from greater social responsibility in aiding a deteriorating labour market, a shrinking tax base and rising public wage bill.
- Looking ahead, the looting and unrest seen in July are likely to have long term effects on the economy, including lost income and jobs, in addition to the cost of rebuilding infrastructure. This will likely be a prominent feature in data for the remainder of the week, most nota-bly in the Absa manufacturing PMI due tomorrow and the Standard Bank PMI on Friday. In the interim, private sector credit growth and M3 money supply data are due for release this morning, both of which should show continued tight monetary dynamics amid depressed business and consumer confidence, thus feeding the view that the SARB will remain on the dovish side for the remainder of the year. Additionally, July trade balance data due this afternoon will be a notable release and could offer some surprises if domestic imports con-tinued to struggle for traction, with the civil unrest adding further pressure during the month. Given the ZAR has derived much of its resil-ience this year from buoyant exports and depressed imports, this holds some market-moving potential should it test assumptions on the pace of future import growth as the economy recovers.
- Externally, risk appetite has remained supported overnight while the dollar continues to track lower on a trade-weighted basis. Mean-while, Asian equities are not as buoyant as at the start of the week after PMI data out of China overnight showed services and factory ac-tivity slowed in August. However, this has had a limited impact on emerging market currencies which remain on the front foot, with the ZAR managing to push stronger in morning trade after struggling somewhat overnight.