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Local Market Commentary
- Data from the Chamber of mines showed that copper production fell to 593,500 metric tons in the nine months through September 30, from 623,815 tons in the same period last year. While production fell, the industry is optimistic that the new changes to the mining tax regime an-nounced by Finance Minister Situmbeko Musokotwane in his 2022 national budget will help spur production after they take effect. Note, the Zambian government made mining royalties deductible from income tax in the 2022 budget in a move to boost foreign investment into the country. Finance Minister Situmbeko wants the industry to more than double production over five years to further underpin economic growth prospects.
- Meanwhile, Zambian Airways is set to return to the skies on December 1, 2021. Recall, in 2018 the government signed a shareholding agree-ment with Ethiopian Airlines to restart operations of Zambia Airways which stopped operations in 1994. But the commencement of operations has dragged on over the years and the launch of flights which was initially scheduled for September 30th, 2021, was postponed. According to the Board of Directors, the airline will initially operate domestic routes on a frequency of five to six times from Lusaka, the country’s capital, to the city of Ndola on the Copperbelt Province and the southern city of Livingstone. The airline will later introduce domestic routes to Mfuwe district in the eastern part of the country and Solwezi in the north western part of the country before adding regional destinations in South Af-rica and Zimbabwe in the first quarter of 2022.
- The price of copper is flat in Asia going into the EU open following gains of 0.83% to close at $9726.50/tonne overnight. This comes as the Inter-national Copper Study Group (ICSG released its report showing that the market had a 52 000 tonne surplus in August versus a 39 000 tonne deficit in July.
- A slight recovery for U.S. provisional PMIs is expected after the composite index fell more than expected in October, brought on by a decline in manufacturing activity as material shortages continued to weigh on production. Despite steadily coming down since Q2/Q3 peaks, according to the PMIs, manufacturing and services activity remain healthy in expansion territory. More broadly, economic data out of the U.S. remains strong and continues to point to a sustained recovery. High-frequency jobless claims data suggests tighter labour market dynamics, which should aid in limiting the effects of labour shortages amidst the sustained recovery in demand. Looking further out, the economic upturn is likely to maintain momentum as the Biden administration continues to push for a $1.75trln social spending package. This will add to the nearly two years of extremely accommodative monetary policy and support the U.S. economy as supply chain, and economic normalisation contin-ues.
- Congress has urged President Biden to release some strategic reserves to help lower the price of oil and reimpose an export ban on energy to ensure that the U.S. can remain self-sufficient through any upcoming difficulties. The U.S. has persisted in keeping the pressure on OPEC to respond to the higher prices and to take steps not to derail the global economic recovery.
- In the last bit of news, Biden nominated Fed Chairman Powell for another term in office, ably assisted by Lael Brainard, who also has enormous experience at the Fed. The message is continuity and stability, with both likely to ensure that the Fed’s inflation mandate is adhered to over time. Under this Fed, the pace of policy normalisation and taper could even speed up if the data continues to impress and allude to a strong economic upswing.
- The real deluge of data will be released tomorrow, but the overriding theme will be one of an improving economy that will gather momentum. Overall, the data is expected to reflect an economic upswing that will support the USD bulls to help consolidate their recent gains. Core to the appreciation will be the weakness of the EUR amid fresh lockdowns and the anticipated disparity in monetary policy positions between the U.S. and its major trading partners.
Rand and International FX Commentary
- In the main, the factors driving the ZAR weaker vs the USD are offshore at the moment. The USD has jumped on the news that current Fed Chair Powell has been nominated for a second term, while the EUR in particular, has taken an almighty beating as news of more lockdowns be-comes prevalent. The EUR-USD slumped to a 16-month low, and this, by extension, bolstered the performance of the USD against many crosses.
- Fed Chairman Powell will be deputised by Lael Brainard, another highly experienced central banker with a long history at the Fed. Both are known to have firm views on fighting inflation. Therefore, the probability has increased that the combination will not be afraid to bring inflation back to within the mandated target. Such a perception has only enhanced the pre-existing expectation that the USD will enjoy the support from the widening policy mismatch between the Fed and many other central banks, most notably the ECB.
- But while the EUR is on the defensive, talk of a fourth wave of Covid infections in SA is intensifying. This will do SA no favours, especially with the low level of vaccinations which currently stand at just under 30%, while Europe and the US hover around 70% or more. SA’s vaccination rollout has been met with stiff resistance and reluctance. As a result, fears are escalating that SA could face further lockdown restrictions in the future, just as some countries are in the EU.
- This potentially renders the ZAR vulnerable to further depreciation, and ahead of the US Thanksgiving long weekend approaching, there really is no particularly good news why the ZAR should stage a significant comeback unless based on valuation. However, even on this front, such po-sitioning might very well wait until the new week. For now, the USD-ZAR appears to be underpinned and is expected to grind a little higher.