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Local Market Commentary
- Following his meeting with IMF managing director Kristalina Georgieva, President Hakainde Hichilema said that an IMF facility for Zambia will boost the country’s chances of dealing with its debt challenges. According to Hichilema, “the IMF’s role in the international monetary system will come in handy. We are confident that together with such cooperating partners, as a country, we will be able to navigate the debt mountain.” Zambia is seeking to borrow $1.3bn from the Fund under an extended credit facility. A deal with the IMF will form the basis for negotiations with creditors that range from state-owned Chinese lenders to holders of the nation’s $3bn Eurobonds. Note, an IMF technical team is due in the county this week and is set to hold talks with the Ministry of Finance on key policies and reforms being prioritized, economic developments and prospects for the short-term.
- To help Zambia’s efforts to combat the coronavirus pandemic, U.S. Agency for International Development (USAID) announced $18.5mn in additional support for the country last week.
- Copper has built on the gains seen on Friday this morning as inventories in Shanghai approved warehouses fell for the 7th straight week to 44 629 tonnes which is the lowest since 2009 sparking supply concerns.
- The Yangshan copper premium is on the rise again presently quoted at $114/tonne which is off the highs seen in August of $122.50/tonne but sharply higher than the lows seen in June of $21.00/tonne. This suggests improving demand to import copper into China and copper producers around the world will be keeping an eye on these numbers.
- Moving over to the U.S., durable goods orders and the N.Y. Fed manufacturing index are scheduled for release. Neither one is likely to be particularly market moving, making for a quieter start to the week. The data week will end with a flurry with important releases scheduled for Friday, including PCE data and ISM manufacturing data. This week direction will probably be driven by international developments re-lated to energy prices, politics with a vote in the House taking place on Thursday and the unfolding drama concerning Evergrande in China.
- Concerning politics, Thursday will see a $1.0trln bi-partisan infrastructure package head for a vote in the House of Representatives, and it will pass. After that, it will head to the Senate, where again it is expected to pass. It has been scheduled to pass on the day that the sur-face transportation authorisation expires. Although some within the Democrat party would like the larger $3.5trln package attached to this, others felt that this could pass on its own merit regardless of the progress on the larger package. The larger package would need more negotiation, and judging from the language used; it is highly probable that the size will be shrunk in order to build the requisite con-sensus within the Democrats own party. The Republicans, on the other hand, will seek to stymie the larger bill, given that passing it will result in a higher tax burden on the private sector.
- Cleveland Fed President Mester and Kansas City Fed Chair George both indicated that the economy had made substantial further pro-gress towards the Fed’s maximum employment and 2% inflation goal. Furthermore, they offered their support for the Fed to begin taper-ing their asset purchases at the Fed’s next meeting in early November. As the data continues to improve and pandemic disruptions dissi-pate, so the Fed will seek to normalise monetary policy. The expectation is that it could take up until the middle of 2022 to accomplish.
- In the FX markets, the Zambian Kwacha is expected to be under mild pressure this week as demand for hard currency continues to out-weigh supply. Meanwhile, the USD remains largely consolidative, with the modest gains achieved on Friday last week not resulting in any build-up of directional momentum. The USD continues to look for fresh impetus, and with risk sentiment improving in Asia this morning, there is no obvious need to be rotating towards the USD. If anything, the USD could reverse some of Friday’s gains to leave investors un-clear on direction at the start of a new week. If anything, the daily chart of the USD index shows the potential of the right-hand shoulder of a head and shoulders formation building. If losses are sustained early in the week, this formation could become a factor to take into consideration.
Rand and International FX Commentary
- With domestic markets closed on Friday for the Heritage Day holiday, the ZAR snapped two previous days of gains to trade a massive 1.45% weaker on the day. While emerging market currencies were weaker en masse, the ZAR retained its higher-beta status, being the hardest hit amongst the sample of riskier currencies. Notably, the ZAR also underperformed the second weakest currency on the day, the Turkish lira, despite Turkish markets being delivered a surprise rate cut by the central bank.
- Overall, last week involved tougher trading conditions. The USD initially received a haven bid as markets succumbed to risk-off trade over contagion fears stemming from Chinese property developer Evergrande’s solvency crisis. Furthermore, the US Fed’s hawkish tilt at its policy meeting last week saw Treasury yields spike, providing further support to the greenback. However, fading concerns over the Ever-grande saga could now see the dollar trapped between the return of risk appetite and higher yields from prospective Fed policy tighten-ing. For the ZAR, which remains highly sensitive to global sentiment, this could bring about some market indecision over the potential out-look for the USD-ZAR. Friday’s movements took the currency pair above 15.0000 for the first time in a month. While some resistance to these loftier levels was noted, as it ultimately settled at the 14.9500-handle, it is unclear whether the USD-ZAR will retreat in the same way it did in late August. The USD now has a firmer tailwind coming from the Fed and, while South Africa’s growth forecasts have im-proved for this year, significant risks remain to that outlook.
- Domestically, last Thursday the ZAR had to contend with the SARB’s rate decision which ultimately offered little guidance. The SARB was more hawkish than at previous meetings this year and upgraded SA’s 2021 growth forecasts, but failed to deliver much more details than what had already been priced into the ZAR. Given that inflation and expectations thereof remain within the SARB’s 3-6% target range and the risks to SA’s economic outlook, we still do not see much potential for rate hikes into the end of the year. The risks to the ZAR here lies with a strengthening USD as the Fed could potentially begin tapering asset purchases as early as November. For as long as the SARB holds out on joining global monetary tightening cycles, the ZAR will have limited resilience to broader market movements, with yield differen-tials being squeezed and the ZAR becoming less attractive for carry trade investors.
- The new week kicks off with a slim data card in the day ahead, barring an update on US manufacturing health in the form of durable goods orders. However, a relatively empty data card could mean little will get in the way of returning risk appetite which has occurred during the Asian trading session thus far. Asian equities have traded up this morning, while US and European equity futures are signalling more gains in the day ahead. Meanwhile, the USD is currently on the back foot, allowing major and emerging market currencies some breathing room. The ZAR is presently leading the EM basket, which could well remain the order of the day as it recovers from Friday’s tumble.