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Zambia Market Watch –  BoZ set to deliver its latest policy rate verdict

November 24, 2021by Nicholas Kabaso
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Local Market Commentary

  • The Bank of Zambia (BoZ) is set to decide on its policy rate today, with Governor Denny Kalyalya chairing his first MPC meeting since being reappointed governor of the BoZ. Last year, he was unexpectedly fired by former President Edgar Lungu, raising questions about the bank’s independence.  Risks for a rate cut exist given the local currency’s appreciation and the need to create impulse within the private sector to drive an economic rebound. That said, an imminent economic program deal with the International Monetary Fund could see Zambia increas-ing fuel pump and electricity prices, which may add to inflationary pressures and convince Kalyalya’s committee to keep rates steady.
  • Base metals have witnessed some position trimming and risk off with concerns surrounding rising EU Covid infection rates paring growth expectations. We are also heading into the US Thanksgiving weekend which traditionally creates a lull in trading activity and this year will be no different. A strong dollar is also capping any gains for now.
  • The benchmark 3m LME copper price is currently trading some 0.42% lower at the time of writing at $9670.00/tonne. LME inventories have risen marginally with the on-warrant LME copper inventories standing at 62 775 tonnes, the highest level in more than six weeks. This is re-flected in the cash premium which is currently at $94.50/tonne versus over $1000/tonne in Oct.
  • Ahead of the Thanksgiving long weekend, the second reading for the U.S. Q3 GDP numbers is expected to show a slight revision higher, with growth pencilled in at 2.2% according to Bloomberg consensus numbers. The revision comes as consumer spending data has been stronger than first expected, bolstered by accumulated savings and recent wage growth. This will be reflected further in the year’s final quarter, where consumption will drive another strong quarter for U.S. economic growth, especially as concerns over the delta wave abate in the U.S.
  • With inflation a hot topic for traders at the moment, all eyes will be on the October PCE report, given that it is the Fed’s primary inflation index. While the economic recovery remains fragile and uneven, inflation in the U.S. has run hot this year. This has forced the Fed’s hand to begin normalising monetary policy in a bid to rein in inflation expectations. Note that inflation expectations have reached multi-year highs. That said, it is important to note that while inflation risks remain skewed to the topside, the Fed is merely lifting its foot off the stimulus pe-dal and not yet pressing the brakes. We remain of the view that the Fed will only begin to hike rates at the backend of next year or in 2023.
  • After today’s flurry of data, trading conditions will come to a standstill through the U.S. trading session over the next two days, with no data and most households enjoying a long weekend. Black Friday will also hold some interest, but early indications are that pent-up demand and savings will result in a strong Black Friday this year, which will further strengthen the argument for policy normalisation and rate hikes next year.
  • In the lead up to all the data scheduled for release, the USD has paused. It appears to be retaining support from the bulls and might only relinquish that should the data later today come in collectively weaker than expected. However, that is unlikely if recent trends are analysed and so the only question left to answer, is whether the USD at these levels is already fully priced for some strong outcomes, or whether there is more left in this move. Technically speaking, the signals remain bullish, albeit from overbought positions.
  • Meanwhile, the Zambia Kwacha remains on the back foot on a month-to-date basis against the USD. The Kwacha is the third-worst perform-ing African currency, down by 2.53% in November so far as limited hard currency supply has placed pressure on the local unit.

Rand and International FX Commentary

  • Although the USD has paused in its performance, it has retained a firmer bias with the market still responding to the decision to reappoint Fed Chairman Powell for another term and focus on monetary policy disparities between the US and its major trading partners. Today, the focus will shift to the deluge of data the US will release, which may influence the US Thanksgiving long weekend.
  • Among the more important releases out of the US will be the FOMC minutes which will offer further insight into the Fed’s decision making, home sales data for Oct, the core PCE data for Oct, Durable goods orders, the second GDP reading and the Michigan consumer confidence in-dex for Nov. Add to that some labour data, and you have many potential sources of support if the general theme reflected in the data is that of a strengthening economy that will empower the Fed to normalise policy.
  • Domestically, some focus will shift to the BER Business Confidence data, but historically this data has never moved markets much, and there is no good reason to expect it to do so now. Some focus may instead shift to the news that the Department of Mineral Resources and Energy plans to change the mining laws to ensure compliance with the provisions of the mining charter thrown out by the high court. The downside to this is that the mining industry may very well enter yet another period of uncertainty which could have the regrettable effect of deterring investment in the sector until full clarity is given. Once the industry gains this clarity, it will be interesting to see whether investors will even want to participate.
  • Once again, the desire to target a “transformational” agenda and force a particular outcome might very well backfire. The mining industry has been instrumental in helping the ZAR remain stable throughout much of the pandemic and has played a critical role in generating the tax revenues that have helped plug the budget deficit. In other words, the government is already earning tremendous amounts from the mining industry, which it could use for transformational purposes. One needs to question the policy of targeting the very capital that has brought so much benefit to the country and whether such news is truly in the country’s best interests. This news holds the potential to detract from the performance of the ZAR, although it is currently an objective, not a change in law.

Nicholas Kabaso

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