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Local Market Commentary
The Zambian kwacha has had a stellar Q3 so far, with the currency outperforming its African peers. On a quarter-to-date basis, the kwacha has record gains of almost 4% against the dollar to rank as Africa’s best-performing currency. The kwacha gains are roughly ten times that of the South African rand during the period under review. 

Aside from continued central bank intervention in the foreign exchange markets and higher foreign exchange inflows from the mines this quarter, the kwacha has been supported by improved investor sentiment. Sentiment has improved on the back of official creditors agreeing to provide financing assurances that the country needs to secure final approval from the International Fund (IMF) for a bailout of more than $1bn and debt restructuring talks that are set to commence next month. Ratings agencies such as Fitch have already noted that they see the assurances provided by Zambia’s Paris Club bilateral creditor committee as sufficient to unlock the first tranche of IMF funding in the coming months. 

The near-term outlook for the kwacha remains favourable amid continued central bank support and positive sentiment as Zambia moves closer toward a debt restructuring. Room for significant gains, however, remains limited, with the kwacha significantly overvalued on a real effective exchange rate basis. In-house indicators point to the kwacha being overvalued by over 16%.    

Speculators in the copper market are betting a global downturn means the metal used in power and construction has further to fall, despite its recent rebound. It seems as though a lot of funds are mainly only taking short positions on copper as concerns continue to increase about a global recession. Today’s CFTC data, therefore, will be closely watched to see if this trend continued through the early stages of this week.

Meanwhile, the 3M LME copper contract has increased for the last six days and is very close to breaking through the 50DMA at $8206.40. Prices may remain supported by a weaker USD, but global growth concerns remain and will keep a lid on gains for now.

On the global front, US Treasuries fell to three-week lows yesterday, with the long-end underperforming following a weak 30-year auction. This helped steepen the curve and unwind some of the inversion that we have seen deepen this week. The front-end remained a bit more anchored following PPI data out of the US that was softer than expected. This followed the weak CPI data earlier this week and suggests that the macroeconomic environment may be starting to improve a little bit. Inflation is still high, and the Fed will still need to hike rates, but the situation is not as bad as many had feared. The market is now back to pricing in a higher probability of a 50bp hike in September over a 75bp increase. 

We saw similar trading themes in Europe yesterday, with bund and gilt yields rising across the board and their curves steepening. UK bonds underperformed their German peers, with traders citing political risk as a factor given all the talk of a possible new BoE mandate. We should, however, note that the general bias for bond markets remains one of flattening of yield curves, and with economic uncertainty likely to remain quite elevated in the coming weeks, we could see this bias persist.

Notwithstanding the much stronger than expected US payroll data a week ago, the USD has steadily lost ground throughout the week, with the catalyst for a big sell-off coming in the form of the latest US inflation data. Although the sell-off has abated, it is clear that the risk to the USD remains to the downside. If such a strong payroll print was completely overshadowed by the softer inflation data, it offers confirmation that the USD is fully priced for rate hikes and that the risks are that the economy slows down faster than expected and moderates inflation to the point where the Fed scales back its tightening. Technically, the trade-weighted USD may be about to experience a deeper correction. Into the weekend, and the EUR has punched through 1.0310/dlr while the GBP is now trading just shy of 1.2200.

Rand and International FX Commentary It has been quite a week for the ZAR. What started out tentatively as investors positioned for a strong USD courtesy of the much stronger than expected US payroll data a week ago turned into the opposite. The public holiday on Tuesday and the effective long weekend kept trading activity muted and largely range bound at the start of the week. Wednesday came, and the much softer than anticipated US inflation data proved to be the catalyst for a significant retreat in the USD.

The ZAR was able to take advantage more than most and outpaced most other emerging market currencies to notch up the strongest performance in a while, helping the pair collapse to levels below 16.2000/dlr. While there may have been some head scratching to justify such a substantial move, the writing has been on the wall for some time now. Valuations, carry attractiveness, ZAR sentiment, a trade surplus and efforts to rely more heavily on the private sector to solve SA’s infrastructural problems are all ZAR supportive. They have created an environment that would allow the ZAR to take advantage of any USD weakness, which is what unfolded.

Going forward, investors worldwide will reassess the US economic outlook and the USD. It is not obvious that the USD should remain well supported only on the back of the monetary policy disparities. While this may sound like a logical justification, it always needs to be considered against market expectations already priced in. Recall that markets are forward-looking and will always try to pre-empt the cycle. The timing may be difficult to get right, but the change in the cycle invariably happens and what may appear counter-intuitive is simply the market looking beyond the current conditions toward the anticipated changes.

Although it is far from guaranteed, that time may have arrived for the USD. While many might argue that the troubles in the EZ and the UK do not warrant a shift away from the USD, one would need to consider how much of that bad news is priced into those majors as well. The net result is that it remains possible that the USD loses ground from its very overvalued position and that the retreat in the USD is the main driver behind an appreciation in the ZAR.

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