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Zambia Market Watch – Headline CPI unchanged at 24.6% y/y in July

July 30, 2021by Nicholas Kabaso

Local Market Commentary

  • Data released by ZamStats yesterday showed that headline inflation in Zambia remained unchanged at 24.6% y/y in July. On a m/m basis, inflation softened to 0.3% from 1.3% in June. Food price inflation, which has underpinned the headline figure in recent months, was un-changed at 31.2% in July, while non-food inflation edged marginally lower to 17.0% from 17.1% in June.
  • The unchanged July CPI sees headline inflation remaining above the Bank of Zambia’s 6-8% tolerance for the 27th straight month in a row. That said, expectations are that inflation pressure may be contained in the near-term following the notable Zambian Kwacha (ZMW) ap-preciation this month, making importing goods cheaper. The ZMW has been Africa’s best-performing currency against the USD in July and is up by 17.76% on a month-to-date basis. Note, the appreciation of the ZMW was not reflected in the latest inflation reading as it hap-pened after the price data was collected.
  • The notable firming of the ZMW has been due to changes in the actual supply of foreign exchange and expectations of further improve-ments in supply associated with the forthcoming IMF Special Drawing Rights (SDR) allocation, improved prospects of a formal Extended Credit Facility (ECF) programme with the IMF, as well as buoyant copper prices. Were a slowdown in inflation to materialize next month due to the firmer ZMW, it could ease some pressure for BoZ policymakers to hike its policy rate at the meeting towards the end of Au-gust.  
  • Meanwhile, Zambia’s trade surplus narrowed to an 11-month low in June, coming in at ZMW 5.29bn from ZMW 6.92bn in the month prior. The surplus, however, widened in comparison to the comparable period a year earlier. While the trade surplus narrowed for a second straight month, a favourable outlook for copper and buoyant prices suggests risks to the trade surplus are tilted to the upside in the com-ing months.
  • Staying with copper, the red metal rallied hard yesterday but has given back some of those gains in this morning’s Asian session. The benchmark 3m LME contract is currently just over 0.5% down on the day quoted at $9796/tonne.
  • Internationally news flow is currently focused on the spread of the Delta variant of COVID-19. Asia has been particularly hard hit, however the rest of the world has not been spared and concerns are growing as to what impact this will have on the rest of 2021 from an economic perspective. Reuters reported the following this morning – Japan’s government on Friday proposed states of emergency through Aug. 31 in three prefectures near Olympic host Tokyo and the western prefecture of Osaka, as COVID-19 cases spike to records, overshadowing the Summer Games. Existing states of emergency for Tokyo – its fourth since the pandemic began – and southern Okinawa island should also be extended to Aug. 31, Economy Minister Yasutoshi Nishimura, who is spearheading Japan’s pandemic response, told a panel of ex-perts in announcing the proposed expansion. Prime Minister Yoshihide Suga is expected to formally announce the move later on Friday af-ter the experts approved it.
  • Moving over to the markets we have Asian equities broadly down on the day with sentiment sour as a result of the spread of the Delta variant as well as the fall out that took place early in the week as China aimed to clamp down causing a mass sell-off of Chinese tech stocks. The region is set to record its worst month since March 2020.
  • The dollar index has managed to gain a foothold after closing below the 92.00 mark overnight. Pressure came as a result of the lacklustre data released yesterday with GDP headlining. The Q2 GDP reading for the world’s largest economy came in at an annualised rate of 6.5% yesterday missing market expectations by a wide margin. Bloomberg’s consensus forecast had the print pencilled in at 8.5% y/y. Investors pushed back the timing of taper expectations from the Fed and this put tactical long dollar traders to the sword.


Rand and International FX Commentary

  • The ZAR strengthened on the back of a notably weaker us dollar in the wake of the Fed’s FOMC policy announcement, which the market took as too dovish to support the greenback’s lofty levels. Since the beginning of June, the trade-weighted dollar index (DXY) rose rough-ly 3.75% to last week’s highs around 93.2. Just this week, the DXY has shaved off 1.15% as of yesterday as it has lost appeal amongst inves-tors amidst lower US Treasury yields and improved risk appetite. As for the local currency, the ZAR’s advance yesterday was equally nota-ble as it led EM currency gains on the day. The dollar’s slide saw the USD-ZAR break through its 200-day moving average around 14.7300 in morning trade, with the currency pair ultimately declining 2% to close at 14.5500. 
  • Data earlier in the day did little to halt the ZAR’s advance, with money supply growth decelerating sharply in June to a record low of 0.12% y/y from 1.82% y/y in the prior print. Meanwhile, private sector credit growth also surprised to the downside, contracting 0.54% y/y com-pared to a 0.42% y/y decline in May. Lockdown restrictions reinstated in June continued to exacerbate SA’s weak credit cycle and will see business activity levels suffer for as long as uncertainty surrounding the virus and restrictions remain in place. The data underscores the low potential for demand-side inflationary pressure to begin lifting consumer prices despite producer price inflation continuing to rise. Further data released yesterday showed SA’s producer price index (PPI) accelerated in June, jumping 7.7% y/y.  Higher producer prices may eventually filter through to consumer prices, but, as yet, manufacturers remain unable to pass on all cost increases, which will con-tinue to see profits and investment squeezed. Ultimately, this will give the SARB more room to support the economy as it remains primar-ily CPI-focused in its decisions.
  • The political sphere was also active in the newswires yesterday. President Ramaphosa hinted that a cabinet reshuffle might be on the cards, with the news seen as a positive development. Meanwhile, reports emerged that government is looking to establish a state bank, using African Bank as a building block. The SARB is currently looking to sell its stake in the bank, which presents government with an op-portunity to use African Bank’s existing license to form its long-touted state bank. While this may help provide banking and financial ser-vices to a larger portion of the population, there are clear risks from the historically poor performance of state-run entities, which have strained SA’s weak fiscus, as well as potential destabilisation of the broader financial system.
  • As for the day ahead, June’s trade and government budget balances round out this week’s domestic data card. The trade balance is ex-pected to have maintained a robust surplus given the continued economic normalisation of SA’s main trading partners. Still, it will indicate whether the ZAR’s decline since June was in part linked to trade dynamics. Externally, markets may shrug Eurozone GDP and inflation da-ta this morning, given last week’s dovish guidance from the ECB. Later on, US core personal consumption expenditure (PCE) data will hold focus as it remains the Fed’s preferred measure of inflation. This may provide some support to the USD into the weekend if inflationary pressures continue to build, while some profit-taking may equally limit losses for the greenback this week after yesterday’s moves across broader FX markets.    

Nicholas Kabaso

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