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Zambia Market Watch -Strong US inflation print sends investors scurrying back to the USD as a safe-haven instrument

November 11, 2021by Nicholas Kabaso
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Local Market Commentary

  • Speaking in Parliament yesterday, Zambia’s Foreign Affairs Minister, Stanely Kakubo, said that he had discussed the refinancing of Chinese debt with China’s foreign affairs minister over a telephone call. According to Kakubo, “we are discussing issues to do with how that debt can be renegotiated by the minister of finance.” Kakubo added that China remains Zambia’s key partner, and the government intends to continue strengthening bilateral and multilateral ties to promote investment. Note Zambia has $14.4bn of debt it needs to renegotiate, including guar-antees for state-owned enterprises. Of that, roughly $3bn is made up of Eurobonds, around $6bn is owed to China and its banks, $2.3bn to multilateral institutions such as the World Bank, and the rest to other bilateral creditors.
  • Fears of a strong US inflation print proved correct. US consumer prices rose 0.9% m/m in Oct, leading to a 6.2% y/y growth, which is the highest in over 30 years. Core US inflation rose to 4.6% y/y due to a 0.6% m/m increase in October to take the core measure comfortably over double the targeted inflation measure. All this comes against a backdrop where US weekly jobless claims fell a further 4k to 267k as the labour market continues to stage a solid recovery..
  • The combination triggered a surge in the USD, which eventually punched through the upper limit of its recent range and opens the door for further short-term appreciation. Higher inflation in the US gives rise to concerns about stagflation. It will erode spare disposable income as higher wages may not offset the rise in costs of goods and services, and the Fed may be forced to consider being more aggressive in their poli-cy normalisation.
  • While monetary policy will be affected by the trajectory of inflation, it could also be influenced by who is leading the Fed at the time. President Biden is carefully weighing up the options of keeping existing Fed Chairman Jerome Powell in his current position or replacing him with Lael Brainard. For now, Powell is the favourite to gain another term in office, however, progressives within the Democratic party would prefer a change to Brainard. She is widely regarded as a little more dovish and may favour tougher regulation on the banking industry, which is a stance that will appeal to many.
  • As anticipated, US inflation surprised to the topside and sent investors scurrying back to the USD as a safe-haven instrument. Traditionally, higher inflation points to the loss of purchasing power of every USD. But in this case, the focus is on the stagflationary effect that an intense in-flation episode could exert, and how the negative growth could hold asset price consequences. Any negative impact on growth would almost certainly translate into higher levels of risk aversion and turn investors more judicious in where they place their funds. Furthermore, the USD will also benefit from the higher probability that the Fed will need to bring forward the timing of any rate hike to help counter inflation, espe-cially if it becomes stubbornly entrenched.
  • Locally, the Kwacha remained on the defensive yesterday, extending its losses to close north of the 17.400 mark, according to Reuters data as tight FX liquidity conditions continued to weigh.

Rand and International FX Commentary

  • Fears of a strong US inflation print proved correct. US consumer prices rose 0.9% m/m in Oct, leading to a 6.2% y/y growth, which is the highest in over 30 years. Core US inflation rose to 4.6% y/y due to a 0.6% m/m increase in October to take the core measure comfortably over double the targeted inflation measure. All this comes against a backdrop where US weekly jobless claims fell a further 4k to 267k as the labour market continues to stage a solid recovery.
  • The combination triggered a surge in the USD, which eventually punched through the upper limit of its recent range and opens the door for further short-term appreciation. Higher inflation in the US gives rise to concerns about stagflation. It will erode spare disposable income as higher wages may not offset the rise in costs of goods and services, and the Fed may be forced to consider being more aggressive in their poli-cy normalisation.
  • Stock markets have again found themselves on the defensive, commodity prices have retreated sharply and emerging market currencies, especially those linked to commodities, have come under intense selling pressure. Once again, the ZAR has lived up to its status as one of the more volatile EM currencies and looks set to retest its lows vs the USD just below 15.5000. The move comes at a tricky time for investors, with the MTBPS due to be read in parliament today.
  • Investors might be somewhat reluctant to turn overly bearish on the ZAR when the MTBPS may contain some vastly improved fiscal numbers that imply that SA’s risk premium is not what it was at the start of the year. Both overall debt and budget deficit numbers will be revised much lower, and the risk of any fiscal calamity has therefore been pushed out another few years. The SA authorities now enjoy a bigger window of opportunity to implement reforms, and the extent to which Finance Minister Godongwana gives the impression of commitment to those re-forms will determine the response of the ZAR. A strong reform agenda and the ZAR stands to appreciate. Disappointing efforts or commit-ments to reforms failing SOEs and the sectors in which they exist could see the ZAR succumb to the USD surge.
  • It is, however undoubtedly true, that current levels offer something for exporters to cheer. For the mines, in particular, it will help offset any retreat in commodity prices and the trade account will therefore remain reasonably well supported in ZAR terms. It is not yet time to turn overtly ZAR bearish from a fundamental perspective. Now it is over to the Finance Minister to make sure it stays that way.

Nicholas Kabaso

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