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Zambia Market Watch – Domestic focus falls on CPI and trade balance data

July 29, 2021by Nicholas Kabaso
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Local Market Commentary

  • Copper has recovered some of the losses seen overnight with the benchmark 3m LME contract trading some 0.6% higher at $9744.00/tonne at the time of writing. A weaker USD coupled with potential strike action in Chile is providing the fundamental backdrop for longs to launch an assault on the $9800/tonne mark through the course of today’s session.
  • Meanwhile, Reuters reported the following – Canadian copper miner First Quantum Minerals has shelved plans to sell a stake in its Zambi-an copper mines, Chief Operating Officer Tristan Pascall said on Wednesday. China’s Jiangxi Copper Co Ltd had been speculated as a po-tential suitor for minority interests in First Quantum’s Kansanshi and Sentinel mines.
  • In an effort to support the creation of the world’s biggest free-trade area, the African Export-Import Bank is planning to make $40bn in funding available. The lender believes that its credit will help to more than double the share of intra-African trade in the continent’s total commerce, which is currently estimated at 16% within a decade. Note, the African Export-Import Banks is taking on a bigger role after dis-ruptions that came with the coronavirus outbreak squeezed company incomes and slowed financial flows to the continent. Many foreign correspondent banks cancelled trade finance for African businesses and declined to honour their letters of credit during the pandemic.
  • CPI and trade data headline the domestic data today. The former will provide further insight into underlying price dynamics in the econo-my. Note, inflation in Zambia has been above the upper bound of the Bank of Zambia’s (BoZ) 6-8% tolerance range for more than two years and is forecast to stay there until at least Q1 of 2023. While policymakers at the last meeting said that price growth pressures will ease faster than earlier anticipated, Governor Mvunga warned that the bank remains committed to adjusting the policy rate upwards should the expected drop in inflation not materialize. For the latter, buoyant copper prices should support the trade account in the com-ing months.
  • Internationally, focus overnight rested with the US Federal Reserve’s decision on interest rates and its outlook for monetary policy going forward. The Fed unsurprisingly left interest rates unchanged and kept up the pace of its asset purchase programme at its July FOMC meeting. Low interest rates and liquidity support will remain continue to prop up the markets. Chairman Powell said that there is still some way to go before the Fed can begin tapering its bond buying programme, shifting focus to the Jackson Hole symposium in August for more clues on the timing.
  • This morning markets have been focused on developments in China where the tech sector has witnessed massive selling pressure over the past couple of sessions. Investor nerves are understandably freyed given the wild price action of late and this has led to the Chinese authorities stepping up attempts to calm the markets. Beijing came out saying that foreign brokerages not to “overinterpret” its latest regulatory actions, while the state media reported that yuan-denominated assets in the country remained attractive and that short-term market panic did not represent long-term value according to a Reuters report. The vendor also reported that the securities regulator had a meeting with the executives of top global investment banks in an effort to shore up confidence.
  • In the FX markets, consolidation was the order of the day as the Kwacha closed little-changed, taking a breather from the recent rally, which has seen it trade at multi-month highs.
  • Meanwhile, the Fed effectively pressed pause on the dollar rally overnight and we currently have the USD index quoted just north of 92.15 as we head into the start of the EU session. Powell’s dovish tone underpinned the narrative of a weaker dollar, this coupled with the news that the Chinese authorities have taken steps to calm the market has boosted global risk appetite. The USD-CNY remained on the back foot retreating sharply as the market recovered from the shocks earlier in the week and we have seen the likes of the AUD and ZAR underpinned. From a flow perspective, good interest was noted this morning in cable with a range break now placing 1.3990 as the next target for sterling bulls.


Rand and International FX Commentary

  • In terms of local developments yesterday, domestic markets had to contend with National Treasury’s (NT) assessment of the recent riots which rocked the country as it held a briefing on the government’s economic relief package. NT expects the relief package for businesses and individuals affected by the riots to amount to R38.9 billion. On a seemingly positive note, the package will not require additional bor-rowing according to Treasury Director-General Dondo Mogajane. Additionally, tax collections have exceeded expectations, with the addi-tional revenue sufficient to fund the package according to SARS Commissioner Edward Kieswetter. 
  • On growth prospects, NT still expects pre-pandemic levels of output occurring in 2023 despite recent upwards revisions to SA’s 2021 eco-nomic growth. While it is reassuring that government is able to fund renewed social relief grants through higher tax revenue rather than additional borrowing, this still limits the government’s ability to consolidate its debt by relying on temporary measures rather than much-needed structural reforms. Finance Minister Tito Mboweni also sparked some concern as he stated he wants workers to access retire-ment funds as a post-COVID-19 relief measure. While domestic markets largely shrugged this off, investors will likely keep a close eye on this narrative.
  • Meanwhile, the ZAR instead took directional impetus from broader market dynamics, hovering around 14.8000/$ for the majority of do-mestic trading hours yesterday prior to the Fed’s anticipated policy announcement, while the dollar approached the meeting on the front foot as investors favoured the safety of the greenback. Steadier trade than previous sessions this week was ultimately short-lived, with the local unit edging lower against a broadly stronger dollar to close 0.35% weaker at 14.8500/$. 
  • With investors receiving a surprise in the form of an advancement of the Fed’s rate hike timeline after the last FOMC meeting, currency markets were trading more cautiously in general, leading to a mixed EM basket of currencies on the day. However, this time around, mar-kets appear to have been surprised by a more dovish Fed, which maintained that the US recovery still has ground to cover, leaving rates unchanged as expected and providing minimal updates on the tapering front. While the FOMC statement noted that the economy is moving closer to the point where asset purchases could be scaled back, it stated the jobs market recovery has room to run and COVID-19 risks remain prevalent. The Fed noted FOMC members did talk about the process of eventual asset purchase tapering but pledged to give plenty of warning before it does.
  • While the USD gained immediately following the FOMC statement, it has come under pressure overnight as markets deemed the green-back’s recent rally overdone given a persistently accommodative Fed. This has allowed gains to come the way of most EM currencies, with the ZAR leading the charge thus far as it attempts a topside break of its 200-day moving average at 14.7300/$. The day ahead features a full domestic data card with money supply stats, private sector credit growth and producer price inflation all scheduled for this morning. Externally, markets will turn to US GDP and personal consumption data for Q2, which could provide some support to the USD on signs of a stronger than expected recovery in output and consumer spending. 

Nicholas Kabaso

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