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Local Market Commentary
- In a report from the United States Department of Agriculture (USDA), Zambia is forecast to produce a record 3.6mn metric tons of corn in the 2021-22 marketing year due to favorable weather. According to the USDA, the bumper corn crop follows on Zambia’s third-largest crop of 3.4mn tons produced in the 2020-21 marketing year. Moreover, Zambia is expected to have 1.5mn tons of surplus corn available for exports in 2021-2022. A bumper harvest in Zambia could assist in easing food price inflation at the margin.
- On the political front, President Lungu yesterday said that despite internal pressure from the party members in the Patriotic Front (PF) he will not file a petition to challenge the results of last week’s elections. Lungu was quoted as saying, “ I felt under pressure by some of my colleagues that we should consider going to court and petition the election results, and I said it is a waste of time.” Lungu added that peti-tioning the Thursday election results will bring tension in the country, which must be avoided. Those who wish to petition the parliamen-tary results can, however, do so, according to Lungu.
- The copper market is currently under the gun with further losses recorded overnight. The benchmark LME 3m copper price fell by 2.24% to close at $9042.50/tonne. This morning the bloodletting has continued with the price of copper falling by an additional 0.,25% to $9020.00/tonne. The pressure has come from a stronger dollar and concerns that the Fed taper may result in reduced economic dyna-mism in the world’s largest economy namely the United States.
- On a more positive note, the Yanghan copper premium which is a measure of Chinese demand has widened out to $82/tonne from its lows of $21/tonne recorded in June.
- Fed minutes were released last night, and it is clear that Fed officials felt that there was still more work that needed to be done in improv-ing labour market conditions before the taper could begin. However, they also felt that those conditions could be met before the end of the year. What was less clear was the exact date when the taper would start, the pace of the taper and whether the surge in inflation was a bigger risk to the economy than a resurgence in infections given the number of vaccinations. What is perhaps clearer is that there is con-sensus that a taper needs to happen, and that might go some way to explaining the strength in the USD, which continued to appreciate on a trade-weighted basis.
- An interesting sub-plot was also the debate between Fed members around whether monetary policy was still needed to propel the eco-nomic recovery or whether it had run its course and reached the limits of how it could help. Low interest rates can make borrowing cheaper and free up capital to be used in investment. It can, however, also be used in consumption. The moral hazard is that the econo-my consumes through access to debt and overall debt levels rise to the point where they render society more vulnerable to shocks. Run-ning ultra-loose monetary policy comes at a cost, not always visible upfront.
- Of some interest yesterday was also the homebuilding stats which surprised in the way they fell 7% m/m. It would appear that inflation in the sector has lifted prices to the point where they are constraining demand. That is evident in the number of houses that gained authori-sation through building permits but have not yet started to be built. That number was the third-highest on record. That will see activity in this sector start to plateau, but it would be a stretch to suggest that it might drop house prices or negatively impact the balance sheets of households.
- In the FX markets, a bullish bias remains entrenched on the ZMW at present, with the local unit at a multi-month high of around 18.600, according to Reuters data. Meanwhile, Fed minutes released last night proved to be the catalyst that helped the USD break through some key technical levels. Talk of tapering has seen overall levels of risk aversion rise. Stock markets have come under pressure, commodity prices have collectively corrected lower and emerging market currencies are on the defensive. Once again, the safe-haven allure of the USD has attracted investors and the USD has surged. There now appears to be an inverse head-and-shoulders pattern on the daily chart of the trade weighted USD which points to the prospect of further USD appreciation in the coming two weeks.
Rand and International FX Commentary
- The ZAR encountered relatively volatile intraday trade yesterday, reversing earlier gains to trade weaker ahead of the release of the Fed’s July FOMC meeting minutes which has kept markets on tenterhooks. Domestically, inflation and retail sales data offered little to cheer about. CPI data from Statistics South Africa showed inflation fell to 4.6% y/y in July from 4.9% in June. Meanwhile, core inflation, which excludes food, non-alcoholic beverages, fuel and energy, dropped to 3% y/y from 3.2% in the previous month.
- Even July’s supply chain disruptions due to civil unrest were unable to spur any increases in consumer prices, which firmly feeds the view that producers remain unable to pass on persistently higher input costs in a weak demand environment. Despite covering June, the retail sales stats corroborate this as sales growth slowed to 0.6% m/m from May’s 2.3% rise. While tighter lockdown restrictions would have played a part, these have compounded pressure on the industry, which still faces weak consumptive dynamics compared to pre-COVID. Looking ahead, we’re likely to see a contraction in the months ahead as July’s civil unrest will have made a material impact on spending and growth implications. All in all, the data points to continually weak demand-side inflationary pressures due to depressed domestic con-sumptive dynamics, a relatively loose labour market and weak economic growth.
- SARB governor Lesetja Kganyago was also in the newswires yesterday as he spoke of SA’s third-quarter growth prospects. The SARB sees the economy contracting on a quarter-on-quarter basis in Q3 due to the impact of “serious unrest” and the economic damage caused by the deadly riots. For 2021, social unrest is estimated to shave 0.4ppts off the GDP growth rate. While the SARB does expect growth to pick up further out, expanding on a seasonally adjusted annualized basis from Q4 through to the end of 2023, the consequences on Q3’s growth hit appear to be done and likely pushed SARB rate hikes into 2022, if there were ever meant to be later this year as the SARB’s quarterly projection model has suggested.
- While the SARB sees upside risks to inflation from fuel, electricity and administered prices, the above will likely prompt the doves amongst the MPC to hold off on rate hikes this year. Overall, these expectations will add to the downwards bias for the ZAR in the months ahead, as lower interest rates will reduce the appeal of the ZAR’s carry trade where foreign investors borrow in low rate devel-oped economies and invest in higher-yielding currencies.
- Externally, the outcome of the FOMC minutes has been the major market mover overnight. While FOMC members remain divided in out-look and the appropriate policy response, most Fed officials agreed at last month’s meeting that conditions to allow for bond purchase tapering could be met later this year. The reaction in the spot markets has been an overall rise in risk aversion due to talk of tapering, with the US dollar trade-weighted index (DXY) surging to its highest levels this year. The ZAR has been amongst the worst hit, trading 0.6% weaker at the time of writing which has been the USD-ZAR breaking through the 15.0000-handle to the topside in early morning trade. The day ahead sees limited data in the way to derail the risk-averse sentiment, suggesting we should continue to see a rising USD weigh on EM currencies.