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Local Market Commentary
- The CPI reading for August headlines the domestic data card. Note that headline inflation in Zambia was unchanged at its near two-decade high of 24.6% y/y in July as food price growth that has propelled the headline number over 20% this year remained steady. A jump in the Kwacha both last month and so far, this month, making it the best-performing African currency among those tracked by Bloomberg in the period, may help contain inflation pressures as imported goods become cheaper. The currency gained 18.16% against the dollar in July but was not reflected in the latest inflation reading as it happened after the statistics agency collected the data. If the slowdown in the monthly figure and the appreciation of the Kwacha filters through into August’s reading, it may ease pressure on the central bank to hike the policy rate.
- On the coronavirus front, Permanent Secretary in the Ministry of Health in charge of Technical Services, Kennedy Malama, yesterday said that Zambia would start rolling out the Sinopharm coronavirus vaccine received from China early this month. According to Malama, the vaccine will be rolled out in specific districts this week to supplement other vaccines being administered. Note, Zambia has been adminis-tering the AstraZeneca and Johnson & Johnson vaccine since the launch of the vaccination program mid-April out of the five approved vaccines for the country.
- Copper counters have drifted lower this morning in the Asian session with the market expressing an element of wariness ahead of the Jackson Hole symposium this weekend. The jury is out as to what tone Fed Chairman Jerome Powell will adopt when he addresses the virtual meeting but any confirmation of a taper by the end of the year will pressure metals across the board. We hold the view that he will adopt a measured tone being mindful of the fact that the economic recovery in the US is patchy at best.
- Moving over to the US, still much focus on the politically damaging calamity that has become the Afghan withdrawal of U.S. troops and cit-izens. The Biden administration has steadfastly refused to move the timeline for withdrawal and raised the ire of some of America’s allies. Secretary of State Blinken has also advised that there are still about 1,500 US citizens in Afghanistan and that it is working on contacting them or given them instructions to get to Kabul airport. The end of August is now just days away, and the pressure to evacuate remaining U.S. citizens is high.
- It will be a slightly more interesting data day today, with both the second GDP reading and the weekly jobless claims data scheduled for release. Citi’s economic surprise index suggests that hard data overall has been missing more lofty expectations, although the outcomes have been off an elevated base. Arguably the more important data set will be the weekly jobless claims number as investors continue to search for proof that the labour market continues to improve.
- In the FX markets, the Kwacha resumed its appreciating trend yesterday to close south of 16.500, making it Africa’s best-performing cur-rency against the USD. A strong trade balance reading today could provide further impetus for Kwacha bulls.
- Ahead of the Jackson Hole symposium that begins tomorrow, the USD remains on the defensive, struggling to make back any more ground as investors position for a Fed that is likely to remain supportive of the economy for a little longer. The Fed will be in no rush to ta-per asset purchases with the delta variant still spreading rapidly and posing a risk that may need to be mitigated through further re-strictions. Through today, not much movement is anticipated. Firm directional momentum will likely materialise next week.
Rand and International FX Commentary
- The ZAR continued to strengthen yesterday, closing 0.30% stronger at 14.9600/$, as the market remained convinced that last week’s risk aversion took the unit well into oversold territory. However, the local currency did pare gains yesterday as it bounced off the 14.9000/$-handle, while EM currencies were not the sea of green that we have seen earlier in the week as risk appetite begins to show signs of fad-ing ahead of the Fed’s virtual Jackson Hole symposium.
- On the local front, Deputy Governor of the SARB, Kuben Naidoo, said in a webinar yesterday that the reserve bank expects inflation to remain close to the midpoint of its 3-6% target range over the next two to three years, which is ultimately proving to be part of the reason why the SARB is not in a rush to hike rates. While the SARB wishes to remain accommodative to the broader economy, keeping borrowing costs low and encouraging bank lending, there are clear risks to the currency outlook should SA fall behind on its rate hike cycle compared to other EMs. However, the weak economic backdrop has not seen any scope for rising inflation. At the same time, the SARB remains steadfast in its data-dependent approach to achieve its inflation target and mandate of price stability.
- The consensus in the SARB is that interest rates can be kept accommodative for at least another year or two. More specifically, the central bank may hike rates, but not aggressively, and instead keep SA’s interest rates accommodative on a global scale. Domestic rate hikes would likely coincide with sustained currency weakness following moves in the global rate hike cycle, namely amongst DMs such as the US. Ultimately, the ZAR would take the brunt of the market pressure in this scenario if the SARB continues to adopt a wait-and-see ap-proach, where it would only react to currency depreciation triggering expectations for supply-side inflation.
- Additionally, fiscal risks remain high and could be another trigger to currency weakness. On that front, National Treasury now sees the 2020/2021 budget gap at R552 billion or 11% of GDP. While better than the 11.2% reported in May, the lack of structural reforms and fiscal consolidation will see this improvement as cold comfort for the broader economy. Furthermore, the public sector wage deal struck last month for a 1.5% salary increase, plus a cash payment, will cost roughly R20 billion in the 2021/2022 fiscal year. This cost was above the compensation ceiling contained in this year’s February budget, and thus conformed to expectations as a clear risk to sovereign credit rat-ings in the future.
- For the day ahead, domestic producer price inflation will round out the SA data card for this week, but will unlikely hold much market-moving potential given manufacturers remain unable to offload higher input costs onto consumers significantly. Ahead of the Fed’s sym-posium, markets will turn to US initial jobless claims and the second reading for US Q2 GDP growth today for an update on US economic health. While the USD has come off recent highs this week, US Treasury yields have edged up, with the 10-year tenor reaching two-week highs yesterday. This could begin to offer the USD some support into the end of the week, while fresh hints of Fed tapering will also reig-nite the upwards bias for the greenback at the expense of EM currencies.