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Local Market Commentary
- In a move to boost foreign-exchange reserves, which are currently near record lows, reports quoting Zambia’s Central Bank Governor Christopher Mvunga suggest that Zambia will start buying gold from Canadian miner First Quantum Minerals. According to Mvunga, “dur-ing periods of market stress – when assets would be losing value – gold would be adding value, thereby shielding the whole portfolio from large losses.” Under an agreement signed between Zambia’s central bank and First Quantum, Zambia will buy gold produced as a by-product of the latter’s Kansanshi mine.
- In the base metals complex, copper finished the week on a strong footing gaining some 0.83% on the final day of trading to record $9518/tonne by the close. This morning the market is trading flat as traders unpack the developments over the weekend which include the release of the Chinese import data.
- Imports of copper into China rose for the 2nd straight month the data released yesterday showed. Reuters reported that arrivals of un-wrought copper and products into top copper consumer China were 410,541.3 tonnes last month, the General Administration of Customs said. That was up from 406,015.6 tonnes in September but down 33.6% from a year earlier. Imports in the first 10 months of 2021 were down 21% year-on-year at 4.43 million tonnes.
- In the US, over the weekend, Biden eventually announced his $1.0trln infrastructure bill, which passed through the House of Represent-atives on Friday. Although some moderate Democrats did not vote in favour, some Republicans did ease the bill’s passage. This will go down as Biden’s biggest legislative win so far. However, it does mean that the spending on climate change and the social safety net will now be tabled separately, which may make it a far more difficult bill to pass if it ever does.
- Data last week also confirmed that the U.S. business cycle is firming. The labour data released were all positive and beat expectations to the topside. They alluded to an economy gaining momentum and a Fed that would be encouraged to continue tapering. The markets have responded positively to the news, with Wall St notching up fresh record levels. It would appear that investors are not perturbed by the flattening yield curve just yet and that monetary policy is still considered accommodative.
- Finally, through the week ahead, the focus will turn back to inflation. It will be the main event of the week, and risks coming in a little higher than anticipated as a combination of high commodity prices, a strengthening labour market, and logistical supply chain costs all ex-ert some upward pressure on prices. A strengthening credit cycle will only serve to bolster underlying inflationary pressures further and keep them elevated for a little longer. This is the threat that the Fed can now argue it is responding to.
- In the FX markets, the USD ended the week on the defensive. After initially surging on the better than expected non-farm payrolls data on Friday, the USD reversed direction and gave back all it had gained and then some. While on the one hand, the firmer data suggests that the economy will strengthen and the Fed will tighten, on the other, the yield curve flattened. That flattening in the yield curve was less positive for the USD, not to mention that there had been a lot of good news already priced into the USD. The net result is that the USD is likely to find it difficult to appreciate much further from current levels.
- Locally, the Zambian Kwacha is expected to remain on the defensive this week as demand for hard currency continues to outpace supply.
Rand and International FX Commentary
- It was a very strong end to the week just passed, with the ZAR appreciating some 20 cents vs the USD. It was a strange reaction to what were robust non-farm payrolls data out of the US. However, as has taken place many times before, the amount of good news priced in US markets far exceeded the outcome, and the market sold off into the weekend. Practically speaking, the US still faces enormous twin deficits that, if anything, might be exacerbated by the recovery in the labour market and the potential strengthening of the credit cycle that could follow.
- Domestically, not even the news of more load shedding could dampen the ZAR bulls. With much of the market positioned for further ZAR weakness, the pain trade was a phase of ZAR strength. It materialised, and many were forced to liquidate positions unexpectedly. The news flow at face value certainly didn’t support the need for the ZAR to appreciate.
- However, there is a key event this week that captured the market’s attention. The upcoming Medium Terms Budget Policy Statement is the main event. Fin Min Godongwana will release an update that far exceeds any expectations that followed the budget in Feb. In other words, SA’s budget deficit expanded far less than initially anticipated, and the country’s debt pile, therefore, expanded at a much slower pace. Fiscal risks associated with SA have declined, and exposure to SA now looks a little more attractive than it did.
- ETM indicators show that the ZAR could still surprise in its resilience. The carry attractiveness index places SA fourth out of twenty-two countries, while the ZAR resilience indices show that SA is a far less risky place to invest and now stands in the top half of the table. The ZAR itself remains around 10% undervalued on a real-effective basis, while the ZAR Sentiment indicator shows that the ZAR will remain resilient for another 3-4 months before grinding weaker.
- The biggest risk to the ZAR this week, beyond a shock from the budget, will be the load shedding situation. It seems that a major incident” in Zambia has negatively impacted the supply of electricity, implying that SA will be struggling through load shedding throughout the week. It is has turned into a permanent feature of living in South Africa.