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Local Market Commentary
- Headline inflation in Zambia slowed further in November, coming in at a one-year low of 19.3% y/y from 21.1% y/y in the month prior. On a m/m basis, consumer prices climbed 0.6%. A breakdown of the data shows that food price inflation, a major contributor to the headline read-ing, slowed to 25.4% in November from 28.1% in the month prior. Meanwhile, non-food inflation decelerated to 12.2% from 13.2% in October.
- Inflation in Zambia slowed for the fourth straight month in November, and this was mainly a result of the lagged impact of a stronger Zambian Kwacha (ZMW). Despite the recent weakness on the back of tight supply of hard currency amid high demand, the ZMW has been Africa’s best-performing currency this year among those tracked by Bloomberg, gaining around 19.21%. The stronger ZMW has helped drive down the costs of imports such as household appliances, vehicles, and certain food items like meat and fish. Following the surprise 50bps rate hike by the Bank of Zambia, inflation may slow further in the coming months. Governor Denny Kalyalya said that the rate hike was aimed at steering inflation toward single digits by the end of next year and back within a 6%-8% target range by mid-2023. Inflation has been above the upper bound since May 2019 and is projected to average 22.6% this year. Upside risks to the inflation out-look include an increase in fuel pump and electricity prices to restore fiscal sustainability and a new wave of Covid-19 infections that could dis-rupt supply chains. However, policymakers expect a projected fall in corn prices after a bumper harvest, and good rainfall could lower inflation in the short-term.
- Meanwhile, Zambia’s trade surplus widened to a 4-month high of ZMW 5.3bn in October from ZMW 4.8bn in the month prior. The surplus, however, narrowed in comparison to the comparable period a year earlier. A breakdown of the data from ZamStats shows that the widening of the surplus in October was a result of a more pronounced decline in inbound shipments than exports. Specifically, imports decreased by 6.9% to ZMW 10.6bn while exports fell by 1.6% to ZMW 16bn. With the broader fundamental outlook for copper positive, the trade account is likely to remain in surplus territory and continue to support the Zambia Kwacha, which is Africa’s best-performing currency on a year-to-date basis.
- Speculation is building that the Fed will progress to a faster pace of tapering start in January. Such has been the strength in the recent data that investors believe the risk lies in the Fed speeding up, rather than slowing down, the pace of policy normalisation. Data just this week alluded to the buoyancy of inflation and the strength of the underlying economy. The USD is also trading as if investors are pricing in the risk of the Fed accelerating the pace of normalisation.
- Focus now shifts to the Black Friday sales and early indications of how strong consumptive demand has been. All signs point to a strong end of the season, and a solid recovery in consumption as pent-up demand and excess savings are deployed. If anything, this will strengthen the USD bulls’ resolve and heighten calls for the Fed to turn more conservative. It implies that the USD could end the year with a flurry as investors ro-tate away from the JPY, the EUR and the GBP, favouring a currency whose central bank can lift interest rates.
- Although the U.S. is enjoying a fairly “normalised” Thanksgiving this year, the news of new Covid-19 variants will be carefully monitored lest it spreads widely again. The variant has been identified by South Africa but has been found in the likes of Hong Kong as well. The U.K. has im-posed travel restrictions on S.A. as a result, and the U.S. authorities will be on high alert as more information on the variant becomes available. Outbreaks of this nature pose a serious risk to the global economy and by extension, the U.S. economy.
- The USD has in recent weeks enjoyed a purple patch, but through the Thanksgiving long weekend, trading has been far more subdued, and the USD has, for the most part, consolidated its recent moves. If anything, the USD is showing that it is ripe for a mini-correction. However, while a mini correction could be justified on the back of market positioning, the underlying fundamentals are still more supportive of the USD than not. Position taking will likely be kept small through today’s session, but any signs of a strong Black Friday and the USD could resume its strength next week.
Rand and International FX Commentary
- Overnight, the ZAR has taken an almighty beating. News broke yesterday afternoon of a new variant that was found not just in South Africa but also in other jurisdictions around the world. It is a substantially different variant and thought to be even more transmissible than the delta variant. A consequence of this announcement was that the UK had placed South Africa back on the red list until more is understood about the variant, its impact and whether the vaccines are useful in preventing severe illness.
- The timing couldn’t have been worse. The USD has been on the front foot, and we now find ourselves in the midst of a Thanksgiving long weekend when volume levels are more subdued to exacerbate the move on the ZAR. South Africa now faces the prospect of fresh lockdowns over December, and the tourism industry has taken another major hit with the UK travel restrictions.
- It is now anybody’s guess as to how far this USD-ZAR move extends. But the prospects are not good. It is a blow that the economy can ill-afford at the moment and further compounds the SARB’s concerns about inflation. For SA, this is another perfect storm that will generate loads more volatility and a very uncertain month ahead. That this comes just ahead of the December festive season when market volumes are traditionally lower will make for a messy end to the year.
- Although one can talk about the current move being unsustainable from a fundamental point of view, many ETM models would confirm that the near-term market adjustment for the risks will unfold and will likely take the ZAR substantially weaker. Technically, key resistance levels have been broken with some Fibonacci projections targeting levels as high as 16.70 as the next stop, with 17.30 thereafter. The best SA can hope for is that exporters take advantage of some very attractive levels.