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Zambia Market Watch -Copper rallies on the Fed’s upgrade to US growth and the expectation of more to come

March 18, 2021by Nicholas Kabaso
  • It was uneventful day in Zambia amid a continued dearth of domestic data yesterday. The focus was therefore on offshore developments. 
  • At its latest FOMC meeting, the Fed opted to keep rates near zero and to persist with asset purchases of at least $120bn per month. Although the decision to hold monetary policy unchanged will not come as much of a surprise, the upgrade to growth and inflation may raise some eye-brows. The Fed has indicated that it now expected GDP growth to accelerate to 6.5% this year and for inflation to rise to 2.2%, with both num-bers expected to moderate through 2022. At the previous meeting, the Fed had anticipated growth of 4.5% in 2021 and an unemployment rate of 5%. While growth expectations have been substantially upgraded, the unemployment rate by year-end has also been upgraded to just 4.5%. The bump higher in inflation is therefore considered temporary, and the Fed’s more flexible mandate allows it to ride it out without hav-ing to perform communication gymnastics to justify not responding to the rise in inflation. It is also fair to say that the Fed will want to see what the effects of the latest fiscal stimulus package will be before responding, although even here, the Fed will likely consider the fact that this stimulus will also exert a temporary effect on growth. At 6.5%, it appears as though the Fed has adjusted its forecasts to reflect its expecta-tions on growth of the latest stimulus package.
  • In the way of data for today, the latest leading indicators are scheduled for release. Further growth is anticipated in line with the expectation that the US economy will stage a solid recovery through H2 2021. With the Fed having upgraded the growth forecast for the year and with the $1.9trln stimulus package now passed, sentiment and confidence will have improved further and the seeds of the next cyclical upswing have been planted and are starting to germinate. The US is about to enter a multi-year growth cycle that has been given a strong boost, to put the effects of the pandemic in the rear-view mirror.
  • On the base metals front, the benchmark 3m LME copper contract added some 1.16% yesterday as the Fed affirmed its expansionary stance on monetary policy. The red metal along with most industrial metals remained bid in the Asian session as the markets applauded the Feds stance which will undoubtedly ensure strong liquidity and growth prospects for the world’s largest economy. 
  • Keeping the copper price from running away this morning was the news of rising inventory levels. The LME warehouse stocks hit their highest level since Dec 30 at 107 275 tonnes.
  •  In the FX markets, Kwacha remains under the cost at present amid sustained demand for hard currency and scanty inflows. Following last night’s Fed announcement, the USD has found itself on the defensive.  Affirmation that the Fed will persist with its ultra-accommodative monetary policy despite the upgrade to growth and inflation has led investors to believe that the Fed’s stance will further debase the USD. Technically, the USD is trading heavy and looks set to retreat a little further through the week ahead. The steady rise in US Treasury yields will however lend the USD some support and an overly bearish short-term view on the USDF carries its risks. Downside momentum on the USD may well dissipate in the trading sessions ahead.

Nicholas Kabaso

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