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Local Market Commentary
- Zambia’s Chamber of Mines on Friday reported that copper mining operations at least three open pits had been suspended following in-vasions from illegal miners. According to the Deputy CEO at the Chamber of Mines Talent Ng’andwe, the invasions, which started in July, have hobbled operations at the 60,000 tons-a-year copper mine, reducing the “company’s ability to meet its scheduled production target for the 2021 production year. “Ng’andwe added that “the illegal mining operation at our Member Mine if left unresolved will shorten the life span of the mine and hence close it prematurely.” Note Luanshya Copper Mine, which is operated by China Nonferrous Mining Corp. was just beginning to recover after struggling for years under low metal prices. Illegal mining activities have spiked in Zambia in recent months, driven in part by recovering copper prices amid high unemployment levels across the country’s mining regions.
- The final trading session of the week saw the Zambian Kwacha (ZMW) extend its rally amid optimism that opposition leader Hakainde Hichilema will promptly resolve the country’s debt woes after a landslide election win. Investors anticipate that Hakainde Hichilema, who will be sworn in on August 24, will be able to secure an IMF economic program and associated $1.3bn loan by April next year. Moreover, investors expect the president-elect to revive the economy, which has been wrecked by years of overspending that led to the govern-ment defaulting on its external debt since November.
- Gains on Friday saw the Kwacha close at a more than 16-month high, just shy of the 17.00 mark. On a weekly basis, the ZMW gained over 13%, making it the world’s best-performing currency out of more than 140 currencies tracked by Bloomberg globally. Note the ZMW’s rally has all but erased 2020’s steep losses as offshore and onshore investors sold dollars while some importers held off purchasing them amid expectations of further ZMW appreciated. On a YTD basis, the ZMW is now up by around 24% to make it the best-performing African cur-rency.
- Hichilema has pledged to accelerate talks with the IMF to secure the funding needed to reduce the nation’s unsustainable debt level, and many see the incoming president’s policies as enabling the deal. Moreover, comments by outgoing President Edgar Lungu that he will hand over power within the country’s laws has further underpinned sentiment. Against this backdrop, risks for a bullish bias in the ZMW to persist in the near-to-medium term exist.
- 3m LME Copper managed to claw back some of the losses seen last week booking gains of 1.6% on Friday. It was a mixed bag for other base metals with the lines of lead and zinc shedding ground while nickel and aluminium finished in the green.
- This morning there is a positive undercurrent across the base metal desks in Asia as no new COVID-19 cases in China spurred hopes of demand rebound in the world’s second largest economy. 3m LME copper is currently changing hands at 1.20% higher on the session at $9145.00/tonne while nickel is up by 2.75% at $18970.00/tonne as we head into the EU open.
- The past week has been a volatile one for global financial markets. The USD has capitalised on that volatility and uncertainty. Still, early trading out of Asia this morning raises the prospect that the move in the near term may have played itself out ahead of the Jackson Hole symposium that is due to start on the 27th. In an interesting turn of events, the symposium will now be held virtually in what many have interpreted as a sign that the pandemic still features prominently in the Fed’s thinking. Add to this comments from the Fed’s Kaplan that he may need to change his views of an early taper if the delta variant continues to spread, and the USD might well come in for some cor-rection given just how far it has rallied in the past two weeks.
- The timing of the taper is driving market sentiment at the moment. Any data or comments that bring forward the timing of a taper and the USD surges. The opposite also holds true. This weekend’s Jackson Hole symposium is, therefore, an important event. In the run-up to this event, the USD might very well take a breather as investors lighten up on any long USD positions to head into the event square. Then there are also the very fluid events in Afghanistan that hold the potential to change. The combination may tilt the scales in favour of many taking to the side-lines until the dust has settled.
- The USD has corrected lower this morning. The retreat may be tentative given the broader trend, but it appears that some profit-taking is in order for now. After two weeks of gains, the USD is now on the defensive, and it may be that the upcoming Jackson Hole symposium is a big enough event that investors will be reluctant to take on any more large directional positions. It implies that some consolidation may be in order at the start of the week until the Fed gives its detailed assessment. Asian stocks have started on the front foot, and immedi-ately, the USD has corrected a little lower.
Rand and International FX Commentary
- Last week, the ZAR ended on the back foot as it declined 0.80% against the US dollar on Friday, being the second-worst performing EM currency on the day, faring only better than the Mexican Peso. Meanwhile, the US dollar trimmed some of its weekly gains as the world’s reserve currency showed signs of pulling back from recent 9-½-month highs.
- Despite a weaker dollar on the day, as the euro and haven currencies such as the Japanese Yen and Swiss Franc steadied, the ZAR strug-gled to capitalise even after the announcement that the SA government would allow all those aged 18 and over to be vaccinated. While this will undoubtedly aid SA’s recovery going forward and limit further COVID-19 infections where another spike is forecasted for Decem-ber, domestic assets and the ZAR were unable to shrug off the overall dim market sentiment which emanated from last week. The ZAR was ultimately the worst-performing EM currency over the week as it fell 3.80% against the surging dollar, closing at the 15.3000/$-handle, its weakest since March.
- With the ZAR continuing to show high susceptibility to changes in external sentiment, the outlook for the local unit will be linked to broader dollar moves and prospects for US monetary policy tightening for as long as this is the case. In this morning’s trade thus far, the ZAR and other higher-beta currencies appear to be making a sharp U-turn from last week’s losses, capitalising on broad dollar weakness at the start of the week. However, there are no clear indications that the dollar’s rally has run its course, especially with Fed officials meeting later in the week where taper talk will remain the theme amongst newswires.
- On the data front for the day ahead, August’s provisional manufacturing PMIs are due for release today, with Eurozone data scheduled for this morning followed by Stateside data in the afternoon. As has been the case in previous releases, disparities amongst these data hold the possibility of showing varying paces of recovery and thus the possibility of diverging outlooks for monetary policy amongst de-veloped economies.
- This week’s domestic data card holds the SARB’s leading indicator for June and second-quarter unemployment stats, which are due for re-lease tomorrow, while producer price inflation data is scheduled for Thursday. Meanwhile, according to South Africa’s National Joint Op-erational and Intelligence Structure, new threats of countrywide violence and protest action have been circulating amongst social media platforms. If uncontrolled, these threats could weigh on domestic assets at the start of the week. However, unlike the protests which rocked July, measures will likely be in place to maintain civil stability.
- The ZAR has largely shrugged off this news during the Asian trading session as it leads a broadly stronger EM currency basket at the start of the week. Looking at the week ahead, the US PCE core price index will round off the week and will likely take most focus given it is the Fed’s preferred measure of inflation. Markets will also turn to the Fed’s annual Jackson Hole symposium ahead of the weekend, where comments on the tapering of Fed asset purchases will be crucial for market direction in the near term.