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Local Market Commentary

  • Reports citing a document seen by Bloomberg suggest that Mopani Copper Mines Plc, which Glencore Plc sold to a Zambian government-owned company last year, faces electricity cuts over unpaid bills. Mopani Copper Mines was earlier this month notified by Copperbelt Energy Corp of plans to limit supply because of unpaid invoices of more than $20mn. The power cuts are set to commence this week. The latest development further raises the urgency that the Zambian government needs to seek solutions for Mopani, which has struggled to pay bills even during a period of record prices for copper. Earlier this month, Mopani said it had hired Rothschild & Co. South Africa to carry out a strategic review of the operation, which needs about $300mn investment to complete expansion projects that Glencore began. Meanwhile, the government has been trying to find an equity investor for Mopani.
  • Copper prices fell again yesterday, along with most base metals, after new US data showed that consumer confidence has slumped to a 16-month low. Even though this may suggest a higher probability of the Fed easing off from its aggressive tightening, it is always difficult for copper to rally when equities are selling off. Copper prices fell by 0.6% on the day yesterday and remain offered this morning, down a further 0.42% ahead of the European open.
  • Providing some support to the base metals complex this morning is the news that China has cut its quarantine period for inbound travellers to 10 days from three weeks. Although this has provided some support for base metals, prices have not yet bottomed out and are expected to remain under pressure despite the latest recovery given elevated global recession fears.
  • As Q2 draws closer to an end, it is worth taking stock of the performance of the Southern Africa FX complex. With the exception of the Zambian kwacha, currencies in the region have broadly weakened against the USD on a quarter-to-date basis. For context, the Mozambican metical (-0.18%), Botswana pula (-6.64%), and South African rand (-8.94%) have all recorded losses. A combination of external and idiosyncratic developments has weighed on these currencies. Externally, lockdowns in China, high input prices, supply-side bottlenecks, demand-side inflation, tightening US monetary policy, and its impact on global growth and a stronger dollar, which has gained almost 7% on a QTD basis, have pressured currencies in the region.
  • The rand and pula have notably underperformed. External developments have significantly affected the former, while load shedding, floods and port blockages have added downside pressure. However, it is worth flagging that our in-house sentiment indicator is pointing to a strong rand performance through H2 2022 that should offer importers another opportunity to lock in more attractive forward rates. The rand still remains attractive on a carry basis and is undervalued against the USD and EUR, while a weak economic backdrop suggests current account surpluses will remain in the near term. The metical, meanwhile, has recorded modest losses with renewed militant attacks in the northern region denting sentiment. While the metical has come under pressure recently, we see support for the currency emanating from positive policy reform, prudent fiscal policy, and management from the government in the medium term. In addition, capital inflows into the LNG sector will provide a massive boost to the country’s fiscus and should support Mozambique’s terms of trade over the long term.
  • Meanwhile, the kwacha has not only outperformed its regional peers but has been Africa’s best-performing currency in the period under review. Positive sentiment amid rising investor confidence in the economy and some support from the central bank through interventions and credit talks have provided tailwinds to the currency. Going forward, whether the kwacha can meaningfully appreciate further in the coming months will hinge on how soon debt restructuring can occur. Striking a deal with all of Zambia’s creditors, chief among them China, could take longer, raising the risk of further delay from the anticipated timelines on which a deal with the IMF rests.
  • Yesterday the USD appreciated against the majors. Between Brexit developments holding back the GBP and ECB board members talking of utilising endless QE to contain any runaway surge in bond yields, the USD found itself on a firmer footing vs these two major currencies. Furthermore, the recent rise in bond yields, together with the retreat on Wall St and fears of a global slowdown, also impacted risk appetite to help the USD index to firmer levels. Whether the USD’s gains are sustainable amid this morning’s retreat in bond yields will be tested today, with the 10yr UST yield dipping back to 3.13%. Most currencies continue to use the USD’s movements as their compass. The EUR-USD has dipped slighty back towards 1.0500, while the GBP-USD is trading back below 1.2200 this morning. Equally, the JPY is also on the defensive as the BoJ rejects calls to tighten, helping the JPY back up to 136.00/dlr.

Rand and International FX Commentary

  • Stage 6 load shedding is a major blow to the economy. That is the greatest constraint on electricity production since 2019 and again highlights the many challenges that the SA economy faces. Eskom has blamed this on an illegal strike through the vulnerable winter months when seasonal demand is proportionately higher. Disgruntled employees held the country to ransom in a bid to secure a better wage result. However, in the process, they left the grid vulnerable and the country struggling with further headwinds when high inflation and rising interest rates are already exerting recessionary forces on the global economy.
  • It was not surprising to see the ZAR under pressure on this announcement, and equally, there is likely to be some relief expressed this morning as Eskom workers come back to work and normal wage negotiations resume. South Africans will soon learn whether the illegal strike was the main cause of Eskom’s load shedding or simply poor maintenance and unplanned breakdowns as power stations run beyond their limits to keep up with demand. Any easing of load shedding will likely trigger a ZAR recovery of sorts.
  • Still nothing much in the way of material data other than the BER consumer confidence data for Q2 to focus on. That will keep investors a little more cautious as they await the slew of data scheduled for release on Thursday and Friday this week. Although economic data has not been the main driver of ZAR direction, the sheer number of data scheduled for release always offers something to look out for.
  • Finally, it is also worth pointing out that although there was much focus on the Stage 6 load shedding yesterday and the depreciation in the ZAR, it all coincided with a bout of USD strength. However, whether the USD’s appreciation remains intact is questionable, with US Treasury yields retreating overnight and this morning. Again, the focus has turned to the growth outlook and the rising risk of a significant slowdown which might ultimately curtail how much tightening the Fed eventually implements. Any retreat in the USD could see the ZAR trading back below the 16.00 handle without much trouble.

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