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Zambian Kwacha outperforms African peers on a quarter-to-date basis

June 21, 2022by Nicholas Kabaso
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Local Market Commentary

  • While most African currencies tracked by Bloomberg against the dollar have come under some pressure amid a plethora of headwinds ranging from the war in Ukraine, idiosyncratic challenges, and dollar liquidity challenges as global financial conditions continue to tighten, the Zambian Kwacha (ZMW) has outperformed in Q2. The Kwacha is currently the best performing African currency on a quarter-to-date basis against the USD, chalking up gains of 6.44% and suggests that the currency is on course to erase losses of 7.84% recorded in Q1 2022, ranking it among the bottom three performers during that period. 
  • Pulling back the lens, the Kwacha has firmed significantly over the past eleven months. For context, since the end of June 2021 record low, the currency has advanced by around 25% against the USD. The notable strength in the Kwacha has in part come on the back of favorable political sentiment following the election of Hakainde Hichilema as the President of Zambia. More recently, some support has emanated from central bank intervention and positive sentiment amid rising investor confidence in the economy. Ongoing credit talks and a promising mining sector outlook have provided a boost to sentiment. Zambia is becoming a more attractive investment proposition for mining companies since the election of Hichilema and a subsequent mining tax reform. 
  • Beyond this week, where the Kwacha is expected to remain steady amid increasing hard currency supply from companies and continued support from the central bank, further strength in the coming months will ultimately depend on how soon debt restructuring can begin and IMF board approval can be granted. Any further delays could prevent the Kwacha from meaningfully appreciating further in the coming months.
  • After closing Monday’s session flat amid thin liquidity conditions due to a bank holiday in the US, the USD has edged lower this morning as markets remain focused on posturing from major central banks on the path of monetary policy. An improvement in risk sentiment this morning has added to the headwinds for the USD. The strong rebound in the risk-on impulse and the broad-based USD weakness is providing a boost to high beta emerging market currencies this morning. The South African rand and the Polish zloty are leading the charge ahead of the European session. G10 currencies are being led higher by the Canadian dollar and the British pound. With US markets returning to trade today, liquidity conditions are expected to improve. Volatility is also likely to increase as traders position themselves ahead of all the central bank speak this week.
  • Reliable and affordable electricity plays a vital role in the development of an economy. Therefore it is concerning that the latest African Energy Outlook 2022 published by the International Energy Agency found that the number of Africans with access to electricity fell during the Covid pandemic. The IEA said 600mn people, which equates to around 43% of the continent’s population, lack access to electricity. Sub-Saharan Africa has the lowest access to electricity on the continent. The number of people living without electricity increased by 4%, or 25mn people, between 2019 and 2021. This comes after decades of progress. 
  • IEA chief Fatih Birol said that before Covid, there had been lots of promising developments in countries such as Ghana, Kenya and Rwanda. Birol said, “but because of Covid and the economic difficulties, we see that this positive trend is reversing now.” Birol added, “when I look at 2022, with the high energy prices and the economic burden on the African countries, I don’t see many  reasons to be hopeful.” The IEA highlighted that Russia’s invasion of Ukraine has added to the economic strains on Africa from the Covid pandemic, as the conflict has sent the prices of energy, food and other commodities soaring. 
  • To combat the recent degradation in electricity supply on the continent, the IEA head said that Countries need to give international financial institutions, especially development banks, a strong mandate to make Africa and clean energy on the continent an absolute priority. According to the IEA, Africa could get universal access to electricity by the end of the decade with $25bn in annual investment. Encouragingly, the IEA predicts that renewables, including solar, wind, hydropower and geothermal, could account for over 80% of new power generation capacity in Africa by 2030. 
  • While Africa is home to 60% of the best solar resources worldwide, it only has 1% of installed solar energy capacity, highlighting just how far Africa still has to go. Energy scarcity is a significant constraint on economic growth in Africa. That said, meaningful investment into electricity projects in the years ahead could significantly boost economic growth across the continent.
  • The base metals complex had a better day yesterday as bargain hunters emerged following the slide driven by recession fears. Copper finished the session 0.18% higher while aluminium finished 1.15% stronger on the day. 
  • The bullish undertone was not to last and this morning we have the market on the backfoot once again with the likes of US Treasuries rising in anticipation of further hawkish comments from the central banks this week.


Rand and International FX Commentary

  • It was a slow start to the new week as a lack of market-moving data releases and thin liquidity conditions due to a US public holiday kept traders on the sidelines. For the most part, the USD-ZAR continued to consolidate around the 16.0000 handle, gaining only marginally as the return of rolling blackouts in South Africa weighed on the ZAR’s relative attractiveness. 
  • Ailing state utility Eskom announced the return of stage two load-shedding between 5pm and 10pm until Thursday due to an ongoing shortage of generation capacity. It noted that it had 5,232MW on planned maintenance, while another 14,202MW of capacity was unavailable due to breakdowns that may also keep the risk of load-shedding elevated in the weeks ahead. 
  • The lack of stable electricity supply is just one of many well-documented growth headwinds that are preventing a stronger recovery despite the boost in economic activity after the post-COVID reopening. These countervailing economic forces are set to be reflected in today’s release of the SARB’s leading indicator for April, to which ZAR traders will be paying close attention given the implications of growth momentum for prospective SARB policymaking and SA’s trade and current accounts. 
  • With that in mind, note that data released by the Commodities Futures Trading Commission (CFTC) yesterday showed speculators in the market increased their long ZAR positions to a new record in the week of 14 June. This suggests traders are betting on a ZAR rebound from the recent Fed-induced selloff, with the ZAR looking increasingly oversold at levels north of R16.0000/$. 
  • Of course, this bodes well for the ZAR and suggests exporters should take advantage of the current exchange rate while it is still available. Market agents seemingly expect SA’s commodity exports to remain buoyant enough to offset improving import demand, and the SARB to keep up with the global rate-hike cycle. Moreover, with so much in the way of prospective Fed monetary tightening now priced into the USD, the balance of risks is tilted towards the downside for the greenback from here. 

Nicholas Kabaso

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