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Zambia Market Watch –  Zambian Kwacha expected to remain under mild pressure

November 16, 2021by Nicholas Kabaso
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Local Market Commentary

  • On the regional front,  Zimbabwe’s power utility Zesa Holdings plans to import up to 400MW of electricity from Mozambique and Zambia to help end load shedding and power outages that often exceed 12 hours. Zesa executive chairman Sydney Gata said that the need to bridge the power gap with imports stems in part from the Ministry of Finance having failed to sign an independent power producer (IPP) implementation agreement. Gata added that between 20%-35% of electricity imported from Mozambique and Zambia came from IPPs, while in Zimbabwe, the sector’s contribution to generation stood at just 1.5%. According to Gata, “This is the lowest percentage I have ever come across anywhere in the world. We are importing because the government has  been sitting on an implementation agreement for IPPs for over two years now.”
  • In the base metals complex, the 3m LME copper price held below the $9700/tonne mark overnight but has caught a geopolitical bid this morn-ing as with most other base metals. Talks between China and the United States have begun virtually today with both sides aiming to stabilise what can only be termed as highly stretched relations. Commentators have been speaking about a growing momentum from the US side to soften some of the trade tariffs instituted under Donald Trump which is hoped could bolster demand for commodities.
  • Moving over to the US and news flow has been generally positive. The NY Empire State index yesterday beat expectations by a large margin and boosted recovery expectations. The JOLTS data released on Friday did the same, while President Biden signed his infrastructure bill into law yesterday to offer further fiscal stimulation to the U.S. economy. Although it will only assist at the margin, it will be growth supportive. Fi-nally, discussions between President Biden and Chinese leader Xi Jinping appear to have progressed constructively, with both sides focused on more dialogue and on defusing any tensions. Today, the focus will shift to the retail sales data and industrial production for more insight into the economic recovery.
  • After outperforming consensus expectations in September, the market expects the topside momentum in the U.S. retail sector to be sus-tained into Q4 as the labour market continues to tighten and the latest wave of the COVID-19 pandemic subsided. However, high levels of in-flation remain a concern, while the post-lockdown impact of pent-up savings is also fading. Looking ahead, these factors remain risks to the outlook, while removal of monetary accommodation by the Fed may offset some of the broader economic upswing reflected in the credit cy-cle.
  • Equally, if not more important, will be prospects for the productive sectors. Arguably more so than some other sectors in the economy, the recovery in the U.S.’s industrial sector remains particularly fragile despite the reopening of the economy. Industrial production contracted for a second straight month in September. This was partly due to the lingering effects of Hurricane Ida. Adding to the headwinds for the sector is the ongoing shortage of semiconductors, which continues to constrain the production of vehicles and electronics. This comes against the back-drop of subdued business and consumer sentiment. All of the above points to more months of challenging operating conditions. While the re-covery in the industrial sector remains fragile, we expect the broader economy to grow at a solid pace over the next 12 months.
  • Yesterday the USD traded to its strongest levels since July 2020. The much stronger than expected manufacturing data out of N.Y. did the trick as investors positioned for the Fed normalising monetary policy faster than its developed market peers. Although risk aversion remains sub-dued, the USD is still enjoying a relative trade benefit that could extend a little while longer given the reluctance of other developed market central banks to embark on their policy normalisation process. As inflationary type data out of the U.S. strengthens, the USD may initially enjoy further support, but that could be temporary. If inflation cools next year and the need to lift rates abates, the USD will find itself very fully priced and susceptible to bouts of correction.
  • Locally, the Zambian Kwacha kicked off the week on the back foot, extending last week’s losses. The local unit is expected to remain under mild pressure this week as demand for hard currency continues to surpass supply, even with occasional central bank support.

Rand and International FX Commentary

  • Yesterday was a bullish day for the ZAR, although it gave up half of its gains by the trading day. A robust, late afternoon performance by the USD put paid to any hopes of a close below 15.2000, even though the underlying momentum before that showed that it was not just possible but likely. Assisting the USD was a much stronger NY Empire State manufacturing index which reflected a very robust performance to build on the perception that the US economy was in the midst of a solid economic recovery. 
  • This morning, the ZAR appears to have clawed back much of what it lost yesterday afternoon. The impressive part is that it has done so despite the USD consolidating its gains on a trade-weighted basis. In other words, this can now be characterised as ZAR strength rather than any USD weakness. Ahead of the SARB’s MPC announcement on Thursday, it would appear that investors are positioning for a central bank that will embark on policy normalisation. In just the past week, market consensus expectations have shifted from leaving rates unchanged to one of a 25bp rate hike.
  • A rate hike would be a conservative and prudent position by the SARB aimed at pre-empting the normalisation of developed market monetary policies abroad and monetary tightening by other emerging markets. It will guard against the SARB raising rates more aggressively in the future if it is forced to play catch up in a bid to retain some yield attraction. Furthermore, it will send a message to the market that the SARB remains an inflation-fighting central bank with clear independence from the government’s mandates.
  • Beyond expectations of a rate hike, some corporate action may also be playing a role in that Heineken has made an R40.1bn offer to purchase Distell. Beyond the confidence in SA’s longevity, there may also be some substantial inflows related to the deal. At today’s rates, this would equate to approximately $2.6bn worth of USDs that would need to be sold for ZAR. Heineken is also looking to utilise Distell as its gateway into the African market, which will positively contribute to the trade balance. It is likely a good deal for the company and the country, and the posi-tive sentiment is almost certainly playing a role in supporting the ZAR’s performance.

Nicholas Kabaso

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