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Zambia Market Watch –  Firmer dollar drags down base metals complex

November 17, 2021by Nicholas Kabaso
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Local Market Commentary

  • China’s Ambassador to Zambia was on the wires saying that Zambia’s anticipated economic recovery means it is essential that the country’s government initiates negotiations with Chinese creditors.  The Ambassador further said that “we are going to work earnestly and cordially with the Zambian government.” Zambia’s full list of its 44 external creditors shows that the government owes Chinese lenders more than one-third of its total $13.4bn of foreign-currency debt stock. With Zambia having a long and diverse list of creditors, the country’s debt restructuring talks are likely to be complex.
  • The firmer dollar has also dragged down the base metals complex this morning. 3m LME Copper shed 1.16% overnight and the red metal is still mildly under water in the Asian session marking time around $9550/tonne as we enter the EU open. 
  • In terms of near term copper supplies, on-warrant copper inventories in LME registered warehouses are at their highest in nearly 30 days at 53 175 tonnes according to LME data. This is reflective in the spread that cash deliver is demanding over the 3m contract. The spread has contract-ed sharply to $32.50/tonne from $1103.50/tonne a month back.
  • In the U.S. data released yesterday afternoon was strong. Retail sales showed that the consumptive sectors of the economy remained buoy-ant as sales grew 1.7% on the month for Oct, while the production stats showed that the real economy was still recovering, as was demand. Industrial production was 1.2% higher on the month. The combination bodes well for an extended economic recovery in the U.S., which con-tinues to be supported by both monetary and fiscal policy. Focus today on the data front will shift to the latest housing data.
  • Despite being slightly underwhelming in the last print, U.S. housing starts have fared consistently well in the post-pandemic recovery era. The last print saw housing starts fall to 1555k in September, whereas no change from August’s 1615k was expected. Nevertheless, housing starts remain buoyed near pre-COVID peaks, as fresh demand to take advantage of low interest rates has seen the pre-pandemic trend of rising housing starts continue. However, with stubborn inflation bringing forward expectations for eventual Fed rate hikes, we could see demand within the housing and home construction sector begin to wane. Should demand remain robust, though, further risks remain with lingering supply constraints and labour shortages. This suggests that, while remaining buoyed above historical levels, demand for housing starts could show signs of tapering off in the coming months.
  • In final news, Treasury Secretary Yellen has once again warned Congress to move quickly to raise the debt ceiling. Although she predicted that the deadline for running out of funds has shifted to the 15th Dec from the 3rd Dec, there is no reason why policymakers need to wait until the last minute to pass a bill raising the limit. Republicans will use the opportunity to exert some influence over government spending and will re-sist where possible. The Democrats will need to respond, possibly using the supermajority to pass the bill.
  • Strong U.S. economic data has lent the USD support.  It has performed extremely well against the majors, and expectations are that it will re-main supported for now. Only if the Fed shows signs of softening its stance will the USD come in for some correction. However, for now, the EUR and the JPY are being used as funding currencies, and that trend will extend through the months ahead to keep the USD reasonably well supported. Focus today will shift to the housing data for more insight into the strength of the economic recovery, but it is not traditionally much of a market-moving data release.
  • Locally, the Zambian Kwacha remains on the defensive as demand for hard currency continues to surpass supply. The local unit closed north of 17.500 yesterday, according to Reuters data. 

Rand and International FX Commentary

  • At the start of the week, the ZAR reflected a high degree of resilience. At one point, the ZAR even cracked stronger in what seemed like a counter-intuitive move, as other emerging market currencies were on the defensive. But in the last two trading sessions, the dam wall has broken, and the ZAR’s resilience has started to fade. It has come as the USD has strengthened on some stronger than expected US data and as other emerging markets came under pressure. In particular, the Turkish lira has taken a beating on news of rate cuts against a backdrop of in-flation above 20%.
  • While a country like Turkey has scant little to do with South Africa, the sophistication and tradability of the SA market imply the ZAR can be a useful hedging tool. Investors can hedge against the movements in other markets that are less tradable with a position in the ZAR. That may explain, in some measure, the concept of contagion between what happens in some seemingly distant and unrelated emerging markets and the ZAR.
  • Ahead of the MPC meeting, the ZAR may also be a little bit vulnerable. A quick look at the FRA curve shows that there are numerous rate hikes already priced in. Investors have taken some of their guidance from the SARB’s quarterly projection model and the trajectory it alludes to. The point to make is that the market is already positioned for these hikes. If there is a risk in the upcoming meetings, it is not that the SARB’s MPC decides to hike more aggressively, but that they turn more cautious in their monetary tightening.
  • With that being the case, an argument could be made for heading into the MPC meeting long of USDs. The risk/reward payoff profile is skewed against the ZAR and while the USD is finding some solid support and commodity prices are on the defensive, the ZAR will remain a little more vulnerable. Focus today will shift to the latest CPI data for insight into the dynamics facing the SARB. A soft reading, although good news for households and the economy, could ironically count against the performance of the ZAR if investors price in a more gradual rate hike trajec-tory.

Nicholas Kabaso

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