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Zambia Market Watch –  US-Sino relations come back into the spotlight as President Biden and Chinese leader Xi Jinping hold a virtual conference.

November 15, 2021by Nicholas Kabaso
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Local Market Commentary

  • It was a relatively quiet end to the week in Zambia with no meaningful data on tap. The domestic data card remains sparse in the week ahead, with no releases scheduled. On the political front, the ruling United Party for National Development (UPND) has asked the Constitutional Court to remove Section 97(2) from the electoral law in a move that will see the courts easily nullify parliamentary and local government seats which have been challenged. Section 97(2)(a) requires a higher standard of proof in election petitions for the courts to nullify elections, and the peti-tioner is required to show that the candidate and his agents were involved in some malpractice and the majority of voters were prevented from voting for a candidate of their choice.
  • In the base metals complex, the price of copper closed 0.8% higher on Friday at $9711.00/tonne but we have seen the red metal ease this morning on the back of a firmer dollar. 3m LME copper is currently marked at $9677.50/tonne, 0.34% lower on the day. Looking at the near term supply dynamics, we have the premium of LME cash copper trading at $130/tonne over its 3 month measure which indicates supplies are still tight, but nowhere near the extreme levels when we saw the premium rally to over $1100/tonne last month.
  • News out of the U.S. is that the economy continues to recover. JOLTS data released on Friday made for interesting reading in that the number of workers who quit voluntarily rose to the highest levels on record. Not only does this show that confidence in people finding new work has improved, but with the number of job openings also remaining buoyant, it implies that new jobs are coming on stream as well. Therefore, the voluntary quits will be easily absorbed, and we would expect to see the headline labour market data continuing to improve with time.’
  • In the way of data today, only the N.Y. Empire State Manufacturing index will be released. Following a gradual improvement in sentiment through the early stages of 2021, optimism in the state of New York’s manufacturing sector hit a record high in July when the Empire State manufacturing index rose to 43.0. In the months that followed, the index consolidated around 20.0, with the market’s expectation as per Bloomberg surveys being for a 20.9 print in November. This follows as optimism over the U.S. economic reopening has faded amid supply-chain issues that have led to higher inflation. Nevertheless, the U.S. economic recovery remains strong, underpinned by extreme monetary and fiscal stimulus and progress on the vaccination front.
  • Finally, it is worth reminding readers that US-Sino relations will come back into the spotlight as President Biden and Chinese leader Xi Jinping hold a virtual conference. Investors will be looking for signs that relations between the two are thawing. Many points of contention will be brought up.  Trade wars and geopolitics will likely dominate with China, indicating that it would like to discuss the issue of Taiwan. The U.S. will be focused on human rights and trade wars.
  • In the FX markets, the response from the USD to U.S. inflation was powerful. It helped boost the USD in the latter part of the week and ended it on a high. The outlook for the USD is less convincing this morning, with the candlestick patterns already reflecting a retreat off those highs. This week investors moving will look for further clarity from the Fed concerning monetary policy and whether the retail sales data holds up better than the confidence numbers have. However, there seems to be a lot of tightening priced into the USD, and there is a good chance that the market corrects weaker through the week ahead.
  • Although the broader bias remains bullish on the Zambian Kwacha when looking at the year-to-date performance, the near-term outlook por-tends to the recent weakness persisting. For context, the ZMW is expected to remain under mild pressure this week as demand for hard cur-rency continues to surpass supply, even with occasional central bank support.

Rand and International FX Commentary

  • Into the weekend, the ZAR ended the week consolidating its recovery off last week’s lows. At one point, the ZAR was well up on the week and looking to claw back some lost ground. However, a prevailing bias can often unwind ahead of the weekend, only to resume in the next week. Investors prefer not to hold open positions into a weekend when there has been so much news flow to focus on and still more event risk to contend with.
  • This week, that event risk will take the form of the latest inflation data and the SARB’s rate decision. Inflation rates around the globe have been spiking higher and surprising to the topside. It has triggered a response from central banks that need to be seen to be doing something to contain longer-term inflation expectations lest they become entrenched. Many emerging markets have started to hike rates, and central banks through the African continent are showing signs of doing the same. While SA’s inflation has so far remained well contained, there is a high probability that the SARB moves to hike rates pre-emptively.
  • The SARB often describes its current policy stance as extremely accommodative. It would prefer to preside over an environment of positive real interest rates, and it knows that even developed market central banks are aiming to normalise their monetary policies. There is, there-fore, a window of opportunity for the SARB to shift in that direction so as not to be forced to take much more aggressive action, later on, to catch up should it eventually manifest in higher levels of ZAR volatility.
  • For a country like SA that lives with higher levels of currency volatility, there is a need to keep interest rates attractive constantly. The difficulty will be finding the right balance between tightening monetary policy sufficiently to offer the ZAR some protection and not doing too much that it negatively impacts GDP growth. That is why the SARB will move slowly in small 25bp increments.  At the margin, that will be mildly ZAR sup-portive and may well help the ZAR extend its recovery this week. Technically, the bias remains tilted in favour of a deeper slide in the USD-ZAR. 

Nicholas Kabaso

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