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Zambia Market Watch – Zambian Kwacha remains Africa’s best-performing currency, despite recent losses

November 12, 2021by Nicholas Kabaso
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Local Market Commentary

  • In the base metal complex, the price of copper finished yesterday’s session in the green with the 3m LME contract adding 1.05% over Thurs-day’s trading day. This morning we have the red metal trading marginally lower testing the $9600.00/tonne level as we head into the EU open. The downside is however capped by tight inventory levels in exchange warehouses across the major centres.
  • The USD is surging at the moment, with investors focusing on the inflation data earlier this week that surprised to the topside. Investors are positioning for the possibility that the Fed may be forced to bring forward the timing of rate hikes once the taper is completed and that the current inflation episode may extend a little longer than anticipated. For now, it is supporting the USD and heading into the weekend, a signifi-cant reversal is unlikely, but focus will shift to real economy data in the coming weeks to see what resilience the US economy enjoys. Today the focus will shift to latest Michigan consumer confidence data.
  • After rebounding in the first half of the year on the back of optimism surrounding the vaccine rollout and reopening of the economy, consum-er confidence in the US has cratered in the second half of the year. Consumer confidence has plunged back to levels seen during the peak of the COVID-19 outbreak on the back of higher rates of inflation and receding confidence in government economic policies. Going forward, while we expect the recovery in the US economy to persist in the foreseeable future, given all the uncertainty at the moment against the backdrop of mounting inflation expectations, we are likely to see consumer sentiment remain anchored in months to come.
  • Finally, geopolitical tensions may just ease early in the new week. President Biden and Chinese leader Xi Jinping will hold a virtual summit on Monday to discuss a range of issues from trade differences, human rights and military operations in Asia. Investors will hope that the two can restart more constructive dialogue. If the news that flows from this meeting is positive, it will play an important role in bolstering market sen-timent and easing overall levels of risk aversion.
  • The USD extended its surge throughout a quiet trading yesterday as investors turned back to the inflation data released earlier in the week. Such a high inflation reading had investors concerned that the Fed would be forced to respond. U.S. Treasury yields bounced, and immediately the USD regained a firmer footing. Investors are likely to position for an economy that remains strong over the medium-term as well as a strong bout of inflation that will keep the Fed cautious. Focus this afternoon will shift to the Michigan consumer confidence data, but it is un-likely to shift market sentiment much heading into the weekend, with the USD likely to start next week on the front foot and one eye on the virtual summit between the U.S. and China.
  • The Zambian Kwacha (ZMW) has come under some notable pressure since its two—month world-beating rally in July and August. For context, the ZMW has recorded monthly losses against the USD since September and is currently the worst-performing currency on a month-to-date basis, down by -1.13%, when looking at the performance of 23 African currencies tracked by Bloomberg. The ZMW weakness has in part, been driven by tight FX liquidity conditions. Demand for hard currency, especially from importers, has outpaced available supply and thus weighed on the local unit. Moreover, it is worth pointing out that the ZMW rally was in part driven by sentiment and that economic fundamentals re-main the same at present.
  • That said, the ZMW remains Africa’s best-performing currency on a year-to-date basis, up by 21.3% against the USD. Note, the Mozambiquan Metical (+16.78%) is the second best performing currency. The broader ZMW resilience has been partly supported by improved FX reserve levels and prospects that President Hakainde Hichilema will rein public debt and the budget deficit while restoring the nation’s credibility fol-lowing a default on its foreign loans and secure a deal with the International Monetary Fund. While rhetoric on the talks with IMF has been positive and the budget was a welcome step in the right direction, the targets set out by Minister Musokotwane will be difficult to achieve.
  • Although the broader bias remains bullish on the ZMW, the near-term outlook portends to the recent weakness persisting. For context, the ZMW is expected to remain under mild pressure next week as demand for hard currency continues to surpass supply, even with occasional central bank support.

Rand and International FX Commentary

  • News flow for the ZAR has improved as the week has worn on. Eskom has indicated that the current bout of load shedding will cease today. The medium-term budget revealed that SA’s fiscal position is far stronger than it used to be, giving policymakers a larger window of opportuni-ty to implement much-needed reforms. Predictably, the ZAR responded positively to the budget information, but it gave back the ground that it had regained as the afternoon unfolded.
  • Beyond the improved fiscal position, Godongwana did not give in to pressure to raise expenditure, spoke of selling some of Eskom’s coal-powered stations, and highlighted some reforms that would raise the private sector’s influence. Although there will always be more that could be done, this was one of the more constructive updates from a finance minister in many years. Now, what was announced needs to be deliv-ered. 
  • However, the ground the ZAR lost late yesterday afternoon and overnight had nothing to do with SA or how the budget was interpreted and everything to do with the USD’s performance. Even through quiet trading yesterday, it extended its surge as investors turned back to the infla-tion data released earlier in the week. Such a high inflation reading had investors concerned that the Fed would be forced to respond. US Treasury yields bounced, and immediately the USD regained a firmer footing. Investors are likely to position for an economy that remains strong over the medium-term as well as a strong bout of inflation that will keep the Fed cautious.
  • Heading into the weekend, local investors are in a predicament. On the one hand, they would like to trade on the improved information from the budget, but on the other, they cannot ignore a surging USD that has rallied to the highest levels since July 2020. Investors will also be con-cerned that the strong USD will spill over into commodity prices and further detract from the performance of the ZAR. This leaves those ex-posed to the ZAR in limbo heading into the weekend.

Nicholas Kabaso

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