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Zambia Market Watch – ZMW outperforming African peers on a QTD basis

August 18, 2021by Nicholas Kabaso
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Local Market Commentary

  • Copper slumped overnight falling by over 2% to close at $9247/tonne as fears over the Delta variant spreading through China hit the mar-ket. China is the top consumer of the red metal and thus any talk of a demand reduction will see the bears taking the upper hand. Copper was not alone with Nickel contracting by 1.64% on the session and Zinc falling by 0.53%.
  • There has been a rebound in the market this morning which traditionally occurs as short term bargain hunters look for opportunity to book gains. Copper is currently up by around 0.75% at the time of writing.
  • The Zambian Kwacha (ZMW) has had a stellar quarter thus far amid a combination of positive external and idiosyncratic developments. On a quar-ter-to-date basis, the ZMW is up by over 18% and is Africa’s best-performing currency against the USD. The ZMW has made significant gains in comparison to its African peers in Q3 thus far. For context, the next best-performing currency in Bloomberg’s basket of 23 African currencies is the Angolan Kwanza which is only up by 1.23%.
  • The bullish bias in the ZMW in Q3 so far has been attributed to changes in the actual supply of foreign exchange and expectations of fur-ther improvements in supply associated with the forthcoming IMF Special Drawing Rights (SDR) allocation, improved prospects of a formal Extended Credit Facility (ECF) programme with the IMF, as well as stronger copper prices which have also resulted in better foreign- ex-change flows from the mining industry. Note, the Zambian finance ministry last week indicated that Zambia would receive about $1.3bn in SDR’s from the IMF. This is expected to double the country’s foreign exchange reserves, help build external resilience and support cur-rent relative stability in the foreign exchange market.
  • Further providing a tailwind to the ZMW bulls has been optimism that opposition leader Hakainde Hichilema will promptly resolve the country’s debt woes after a landslide election win. 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. Against this back-drop, risks for a bullish bias in the ZMW to persist in the near-to-medium term exist.
  • Moving over to the US, Fed Chairman Powell spoke bullishly about the reduced negative impact the delta variant will exert on the US economy. That is partly due to vaccinations, but also a function of households and businesses learning to live with the restrictions and im-provising. Lives have adapted, and although there are some industries such as hospitality and travel that have been heavily affected, there are others that are thriving. Covid is proving to be a catalyst for change in a way that households and businesses function, and going forward, new paradigms will exist. However, the negative growth impact of those changes is dissipating and is unlikely to impact heavily on the Fed’s decision to taper or not.
  • The last policy update saw a decidedly more dovish Fed, which surprised markets given the previous meeting’s hawkish turn. While the central bank maintained that the US economy still has ground to cover, the statement noted that FOMC members discussed the eventual tapering of asset purchases. However, it remains to be seen in how much detail tapering was discussed and at what point it may occur. The latest CPI print will have moderated tapering bets slightly, given signs of inflationary pressures topping out. Since the last meeting, la-bour market strength has also been noted, which will have likely outweighed the lower CPI print given the Fed’s insistent focus on the jobs market. All in all, the minutes will be closely analysed for hints for when the Fed will be comfortable with the jobs market and what it is willing to tolerate in terms of persistently high inflation.
  • As the EUR continues to slide against the USD on fears related to Covid and a possible influx of refugees and immigrants and as the NZD takes a knock following the RBNZ keeping rates steady, the USD has surged to a nine-month high. It is now on the verge of testing the prior highs seen earlier in August and July before that. A break through 93.2 on the USD index will open the door for a further surge in the USD. The trend for the time being is in favour of a firmer USD and the upside break, especially with investors reducing their speculative bets against the USD.


Rand and International FX Commentary

  • The ZAR swung between gains and losses against a broadly stronger US dollar yesterday but ultimately succumbed to some late selling pressure which saw the unit jump over 1% weaker on the day. However, moves above 15.0000-handle proved too resistant for the USD-ZAR, which bounced off the key technical level, settling at 14.9200 by the end of London trading hours.
  • The ZAR’s propensity to weaken in risk-off trading conditions came to the fore as it led EM currencies weaker for most of the day, while it was also second weakest amongst major currencies at a stage, faring only better than the New Zealand dollar which slumped after the country tightened lockdown restrictions following the first COVID-19 infection since February. Meanwhile, the US dollar remained on an upward trajectory following overnight Fedspeak from Boston Fed President Eric Rosengren suggesting a September announcement to stimulus tapering could be forthcoming should solid labour market gains persist. The USD ultimately surged ahead on a trade-weighted basis, shrugging off weaker than expected retail sales figures in July, and took cues instead from solid industrial production stats. 
  • As for the day ahead, markets may trade cautiously ahead of Fed FOMC minutes scheduled for later this evening. In the interim, the dol-lar will likely remain supported as the market positions itself for potential surprises from the Fed’s last meeting. Ahead of the minutes, UK CPI data will steal the focus in this morning’s trade and is expected to show inflation eased in July. While unlikely to hold major market-moving potential, easing inflation could support risk appetite at the margin given growing concern that the BoE will need to step in and withdraw its support to deal with inflationary pressures.
  • Domestically, market participants will have South Africa’s CPI data followed by retail sales figures to digest. Annual inflation is expected to have moderated from June’s print of 4.9% for the second month in July. This could further temper bets that the SARB will seek to hike rates this year and thus may weigh on the ZAR in the near term. On the other hand, retail sales will likely fall out of focus as the data co-vers June and is thus outdated given the civil unrest in July, which has affected sales in several regions and upended logistics and supply chains.
  • In the spot markets, the USD has come under slight pressure in early morning trade but remains buoyed near last week’s 4.5 month highs. This has offered some reprieve to emerging market currencies which have been broadly in the green during Asian market hours, while major currencies have traded in narrower ranges ahead of today’s calendar releases. ZAR sentiment, meanwhile, has improved no-tably, with the unit amongst the strongest in the EM currency basket this morning. However, EM FX markets in the day ahead remain at the mercy of broader risk appetite and expectations for Fed tapering, which remains the dominant theme for global markets.  

Nicholas Kabaso

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