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Local Market Commentary
- In a boost for a continent currently battling with a deadly third wave of coronavirus infections, countries in Africa are set to receive the first batch of 400mn doses of vaccines from Johnson and Johnson (J&j). According to Strive Masiyiwa, who is a coordinator of the AU task force team on vaccine acquisition, J&J doses will be used to immunize half of the estimated 800mn people in need of the vaccine on the continent. Around 6mn doses will be delivered to 27 nations that have paid their share through the end of August, with another 18 finalis-ing loans from the World Bank and other global lenders before they make payment. Meanwhile, deliveries will rise to an average of 10mn a month from September, increasing to 20mn in January until the order is fulfilled by September next year. Finally, Masiyiwa said that the balance of the vaccine requirements for the continent will come from the COVAX and bilateral donations from developed nations like the US.
- In the base metals complex, the copper price remains on course for a weekly gain as the red metal received a boost from strong earnings results in equities, which helped to offset concerns about a rising infections of the Delta COVID-19 variant which is threatening to shut down further parts of the global economy.
- It is also instructive to note that the cash price of copper over its 3m equivalent has widened out further to $21/tonne which is the largest margin since the 29th July 2021, this indicates near term supply pressures as floods in the EU hurt supply while LME inventories remain at one year lows.
- Moving over to the US, the preliminary release of Markit PMI data for July will be released today and could hold some interest as inves-tors remain sensitive to the growth cycle. The release will gauge whether the solid pace of economic recovery has been sustained this month, although with COVID cases rising again investors seem to be a little more hesitant.
- High-frequency data nevertheless suggests that despite the slight rise in new daily cases and spread of the Delta variant, the US economic recovery remains robust. Looking ahead, with the Fed committed to maintaining its accommodative policy stance together with a legisla-tive push to roll out another massive fiscal stimulus package and the easing of coronavirus containment measures, we expect the pace of economic growth in the US to accelerate in the second half of the year.
- From the fiscal growth push perspective, note that there could be an infrastructure development bill put through Senate on Monday which is estimated to have a $579bn price tag. The bill will be interpreted as growth supportive, although the long-term implications of deficit spending still remain a concern according to traditional economic theory. The increase in government spending is also tipped as a way for spending to be re-ignited in the economy at a time when many are still concerned about viral risk.
- The Zambian Kwacha (ZMW) has had a stellar week and month thus far and is on course, barring any surprises to record a weekly gain against the USD. On a month-to-date basis, the local unit has racked up gains of 2.61% against the USD to all but pare last month’s losses and lead Bloomberg’s FX basket in terms of performance.
- Improved hard currency supply and the positive outlook in terms of forex reserves have in part supported the local currency this week, which has so far gained over 2.0%, when looking at Bloomberg data. Increased mining activities have also increased foreign inflows. Note month-end tax obligations and a further improvement in the supply of hard currency are expected to see the ZMW remain on the front foot next week.
- Pulling back the lens, although the ZMW has racked up some notable gains in recent sessions, it is worth noting that the broader bias re-mains bearish. For context, the ZMW is down by over 4% on a YTD basis and ranks third from last in terms of performance of African cur-rencies against the USD. Deteriorating fiscal dynamics and deeply negative real rates are some of the factors that have detracted from the attractiveness of the ZMW. With these challenges persisting and an IMF deal unlikely until after the upcoming general elections, down-side risks for the local unit remain, and thus a meaningful and sustained rebound is unlikely in the near-term.
- FX markets watched the ECB closely taking in comments by the ECB President Christine Lagarde before making a further call on the out-look for the dollar. The ECB certainly played a tune that supported the dollar, saying that they would keep interest rates at record lows for an extended period to boost sluggish inflation, warning that the spread of the Delta variant posed a risk to the regions recovery. This sets the stage for strong policy divergence with investors now setting themselves up for the Fed meeting next week where more discussions on tapering is expected, even though Chairman Powell has repeatedly stated that the labour market recovery remains well short of their target. Thus, given the backdrop we would not be surprised to see a strong finish for the greenback with the March highs in the cross hairs for dollar bulls.
Rand and International FX Commentary
- Cautious trade prior to the SARB rate announcement saw the ZAR trade in a tight range around 14.5500/$ through most of the day, failing to capitalise on broader sentiment supporting riskier assets and emerging market currencies. Externally, the euro weakened as the Euro-pean Central Bank pledged to keep rates lower for longer to meet its stricter 2% inflation target. This supported the trade-weighted dollar index (DXY) as a result, which was otherwise pressured by weekly jobless claims data rising to a two-month high.
- With global FX markets lacking an outright trend, the ZAR took direction from domestic events, ultimately leading EM currencies lower as the SARB held its key policy rate at 3.5%. The relatively dovish tone emanating from the announcement was more so than the market was expecting, with the ZAR taking the brunt of the policy announcement, weakening 1.35% from intraday highs to close at 14.7000/$.
- The central bank flagged Q4 as the beginning of its rate hike cycle, despite revising its 2021 inflation forecast slightly higher to 4.3% from 4.2% at the previous meeting and seeing short-term inflation risks balanced to the upside. As for growth prospects, the SARB left its 2021 GDP growth forecast unchanged at 4.2%. It noted Q1’s higher than expected growth of 4.6%, compared to expectations at the May meet-ing of 2.7%, was likely negated by the country’s recent civil unrest. While the SARB noted fiscal risks have eased, weaker growth pro-spects and investor sentiment will continue to weigh on domestic assets and the ZAR. The SARB ultimately opted to keep rates low to support the economy through the longer than expected third round of harsher lockdown restrictions and recent devastating civil unrest. Furthermore, structural factors continue to point to inflation being contained due to weak demand-side pressures. Unemployment re-mains staggeringly high, while potential economic growth continues to be hampered by unreliable electricity supply, with another bout of load shedding being unexpectedly announced yesterday.
- While the SARB’s quarterly projection model suggests we will see one 25bps rate hike in the fourth quarter, we still see this as optimistic and likely to occur further out in 2022. Ultimately, a dovish SARB bodes ill for the ZAR, especially as South Africa’s emerging market peers look to their own rate hike cycles. The local currency has continued to trade on the back foot against a buoyant dollar in the spot markets this morning, while riskier assets have generally struggled through liquidity-thinned trade with Japanese markets shut for a long week-end. In terms of data, markets will have July’s provisional PMI prints out of the UK and Europe this morning and US PMIs later in the day. Given the somewhat diverging paths of monetary policy in Europe and the US, with the ECB generally more dovish than the Fed, the data holds the potential to induce bets on that front should the Eurozone’s recovery show signs of faltering against the US’ continued strength. Despite existent expectations that the US economy will reach a stage where the Fed will taper asset purchases before the ECB does, the data could still keep the USD bid into the weekend and thus pressure riskier currencies.