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Local Market Commentary
- Speaking after being sworn in, new Mines Minister Paul Kabuswe pledged to restore stability to the mining industry and help meet the government’s goal of a more than trebling output. According to Kabuswe, “we need to bring sanity in the mines. There’s been so much confusion. There’s been so many different policies. I have grown up on a mine and I know that the mines are not giving us what is due to us as a country. We are going to move in with vigor and make sure that Zambia benefits from the mineral resource.” Note copper produc-ers have indicated that they are ready to start expansion projects worth $2bn in Zambia next year if the industry can reach an agreement on royalties with President Hichilema’s administration.
- African currencies, for the most part, have shown some resilience in recent times. With the exception of the ZAR and the GHS, regional volatility has pulled back in most of the currencies under review. When looking at the 30-day realised volatility, the most apparent im-provement has taken hold in the ZMW followed by the MZN. Note that these are the two best performing African currencies on a year-to-date basis, with the ZMW ranked first and the MZN second.
- Volatility levels in the ZMW have fallen from a recent high of around 35.0% to hover just above 25.0% currently. The ZMW volatility has in part declined on the back of increasing dollar inflows amid the positive sentiment surrounding the new Zambian administration led by President Hichilema. Expectations that the new administration will rein in public debt and the budget deficit while restoring the nation’s credibility following a default on its foreign loans, better foreign exchange inflows from the mining industry, and improved gross reserves following the IMF SDR allocations are all factors that have supported the ZMW. Meanwhile, one of the highest real rates in the world sup-porting carry appeal has been crucial in supporting low levels of volatility in the MZN.
- Although volatility levels have somewhat moderated, there is still a considerable degree of uncertainty priced in for regional markets. This may be the case in the months ahead until there are concrete signs of a nascent recovery in the respective economies. Additionally, headwinds from the pandemic, easing commodity run, and concerns over the global economic slowdown in the world’s largest econo-mies as well as idiosyncratic challenges pose further upside risks to FX volatility levels.
- In the US, the light data week continues, with only the latest weekly jobless claims numbers scheduled for release. Given the weekly na-ture and last week’s payroll numbers, this data is unlikely to impact market sentiment. Interestingly the latest JOLTS data confirmed that a strong recovery in the labour market remains on track. Job opening increased by 749k to 10.9mn people. This data suggests that the dip in the payrolls numbers is not due to a lack of demand for employees and perhaps has more to do with the quality of employees available and the ability to match employee skill sets with the job available. Therefore, it is only a matter of time before the labour market tightens up to the point where wage inflation becomes a more prominent problem.
- Given the lack of data, investors are more likely to focus on the guidance offered by the ECB today to see if it corroborates the Fed’s guid-ance and whether there is still cause for optimism concerning the business cycle. Today, the ECB is expected to scale back some of its emergency support measures. Remaining on the topic of the Fed, several speakers took to the podium yesterday. The three Fed speak-ers included St Louis Fed President Bullard, Dallas Fed President Kaplan, and New York President Williams. All three alluded to the taper starting towards the end of the year, with the caveat being that the data needed to support the necessity to taper. Inflation is already do-ing so. A stronger recovery in the labour market would be enough to convince the Fed to move.
- On the political front, House Speaker Pelosi indicated that the Democrats will not include a provision to raise the debt ceiling in the $3.5trln “reconciliation” spending measure they plan to pass in the next month. Pelosi added that the $28.5trln debt limit needed to be raised but would not say how the bill would be passed. Treasury Secretary Yellen has reminded Congress that the debt ceiling may well be reached before the end of Oct.
- The USD extended its recovery through yesterday’s trade with investors still inclined to be square or slightly long USDs into the ECB deci-sion later today. The risk-off sentiment that has arisen will offer the USD further support, but whether it is sustained or not will depend on the guidance offered by the ECB and the market reaction to that. Data out of the U.S. is likely to support the USD as the year unfolds, and it is more than just a coincidence that speculators, as reflected in the CFTC data, have started to turn more bullish on the USD’s pro-spects holding net long USD positions.
Rand and International FX Commentary
- The ZAR bucked a trend of EM currency weakness on Wednesday, appreciating 0.55% against a firmer USD to close the day at R14.2200/$. The ZAR’s defiance of broader risk-off sentiment through the session was likely due to the market digesting the previous day’s stronger-than-expected Q2 GDP print, and hawkish comments by SARB Governor Lesetja Kganyago. The governor reiterated his call to change the central bank’s inflation framework to a reduced, single-digit target from the current 3%-6% range. He noted that failure in the past to re-vise the original target range – which was always intended to shift down towards 2%-4% – was a “major policy mistake, because it en-trenched higher inflation and higher inflation expectations”. These comments came ahead of an examination of SA’s inflation-targeting framework by National Treasury, although formal discussions between Kganyago and FinMin Enoch Godongwana to lower the target have yet to take place.
- Speaking of the finance minister; Godongwana was also on the wires yesterday, telling MPs that the economic fallout of the July social unrest and looting could linger for the next year and a half. He noted that business sentiment was negatively affected and that invest-ment stalled, affecting the economy’s general competitiveness. This was evident in yesterday’s release of the BER’s business confidence index for Q3, which declined by more than expected from 50 to 43. This drop was primarily due to discontent in the supply-side over the social unrest, but also due to strict COVID-19 lockdown measures, a cyberattack at the state-owned ports and rail operator that hobbled trade activity, and higher-than-usual levels of worker absenteeism.
- July manufacturing production stats scheduled for release out of SA today will provide fresh insights into the economic fallout of the social unrest. Consensus expectations are for declines in the year-on-year and month-on-month growth rates from 12.5% to 3.0% and from -0.7% to -3.7%, respectively, which would reflect severe supply-side weakness at the start of Q3. This release will be accompanied by Q2 current account stats today, which are expected to show a widening of the surplus owing to SA’s strong trade dynamics, and provide a good explanation for the ZAR’s strong performance in the three months through June.