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Local Market Commentary
- The month of July has been a mixed bag in terms of Southern African currencies against the USD so far, with various idiosyncratic factors either supporting or detracting from their performance. On a month-to-date basis, the Zambian Kwacha (ZMW) along with the Mozambi-quan metical (MZN) have traded in the green while the South African Rand (ZAR) and Botswana Pula (BWP) have recorded losses.
- The ZMW (+7.78%) has outperformed its Southern African peers and leads gains in the broader Africa FX basket against the USD. The Bank of Zambia in a press release on Friday attributed the appreciation of the Kwacha thus far to changes in the actual supply of foreign exchange and expectations of further improvements in supply associated with the forthcoming IMF Special Drawing Rights (SDR) alloca-tion, improved prospects of a formal Extended Credit Facility (ECF) programme with the IMF, as well as buoyant copper prices. Stronger copper prices have also resulted in better foreign- exchange flows from the mining industry, while improved prospects that Zambia will secure an IMF deal have also supported the Kwacha. Note, on Friday, the ZMW rallied for the fifth straight session, and a further im-provement in the supply of hard currency this week is expected to see the ZMW bulls remain in control.
- The base metals complex remained underpinned into the close on Friday with an index covering the LME London traded metals climbing to its highest level since mid-June at 4225.1001. 3m LME copper finished some 0.79% higher while Nickel rallied sharply closing 2.35% high-er on Friday.
- The bullish tone has continued this morning, copper is currently trading some 1.24% higher in Asia at $9634.00/tonne while Nickel has added almost another 1% on the session with the metal priced at $19555.00/tonne as we head into the EU open.
- International news flow this morning has focused around the US-China meeting in the eastern Chinese city of Tianjin. Deputy Secretary of State Wendy Sherman met with Vice Foreign Minister Xie Feng and discussions were frosty at best. Xie according to Reuters was quoted as saying – The United States “wants to reignite the sense of national purpose by establishing China as an ‘imaginary enemy’,” Relations have deteriorated rapidly since the first meeting in March with the US hitting China with import bans over labour concerns in the Western region in conjunction with being extremely critical of China’s policy in Hong Kong and Xinjiang. Talks will continue today before Sherman heads to Geneva where she will meet with the Russians to discuss nuclear arms control.
- This week’s Fed meeting will be closely watched given what happened in June when a shift in the Dot Plots roiled markets and saw inves-tors drastically bring forward their bets on the timing of rate hikes. Since then, these bets have been reversed to some degree amid a re-turn of growth concerns, while Fed Chair Powell’s recent testimonies have calmed investors fears over potential tightening in the near term. This week’s meeting is unlikely to cause such a stir, but it could still move the markets as any hawkish comments will see the Fed’s policy divergence with many of its peers highlighted, which will support the US dollar and drive up UST yields once again.
- The USD remains at a multi-month high at the start of the week with investors shifting focus towards the Fed meeting which takes place on Wednesday this week. The world’s reserve currency remains on the front foot against the euro and is at a 12 day high against the yen with better performing equity markets enhancing risk sentiment this morning. Volumes have been low in Asia with however there was some interest in the yuan which sold off post the PBOC instructed Shanghai banks to raise mortgage rates to stem the overheated prop-erty sector. Looking ahead we expect EU flows to be equally unimpressive with a lack of data adding to the to the apathy.
Rand and International FX Commentary
- The ZAR depreciated into the end of the week, losing another 0.95% on Friday against a broadly stronger US dollar. While the USD re-mained favoured against most higher-beta currencies last week, the local unit had the aftermath of deadly domestic riots to contend with, as well as a less hawkish SARB last week Thursday. This saw the ZAR underperform the broader EM sample of currencies as it led de-clines last week, tumbling 2.85% to close at 14.8500/$.
- Despite a general improvement in market sentiment last week, with global equity markets rallying in the latter of the week, FX markets have had a more challenging time rebounding against a buoyant USD. COVID-19 risks remain a genuine concern for markets, those being levelled-up economic restrictions, while the greenback has remained bid ahead of an upcoming Fed FOMC rate announcement later this week. Recall, the last FOMC meeting in June culminated in a significant surge for the dollar as the market received a surprise from the Fed fast-tracking its expectations for eventual rate hikes by one year. Since then, the dollar’s rise has gone largely unobstructed as the trade-weighted DXY sits roughly 3.5% higher than it did at the beginning of June. This has led to the gradual easing of dollar shorts, which accord-ing to the latest CFTC data released on Friday, the market turned net long dollars for the first time since March 2020. More specifically, the net long dollar position was $399.69 million in the week ending July 20, compared with a net short position of $4.06 billion in the prior week.
- All this to say, that the tide may be turning against EM currencies which have capitalised on dollar weakness in the wake of COVID-19’s market rout last year. Furthermore, optimism surrounding South Africa’s growth prospects will likely have been undone by the recent ri-ots and looting. In order to support businesses and individuals affected by the riots and lengthier lockdown restrictions, President Rama-phosa announced a new relief package last night as he also eased the nationwide restrictions. The new relief package includes a monthly welfare grant of R350 until March 2022 and a R400 million state contribution to a relief fund for uninsured businesses affected by the loot-ing. On the latter addition, the IMF noted that South African should aim to reprioritise its budget to offset relief measures for businesses and individuals affected by riots and accelerate reforms to promote inclusive economic growth.
- While the dollar’s broader path remains to be seen, near term risks associated with SA investment are amplified, while the fiscus remains under pressure with tax intake likely to take a dip this quarter. In the near term, this ultimately sets the ZAR to remain on the back foot, with the local unit struggling to capitalise on a broadly weaker dollar in early morning trade. Friday’s moves saw the USD-ZAR break above its 200-day moving average with limited resistance, suggesting the market may be comfortable with higher levels, especially ahead of Wednesday’s Fed rate announcement.