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Zambian Kwacha remains under pressure on a YTD basis

March 3, 2021by Nicholas Kabaso
  • The Zambia Stanbic/Markit PMI reading for February is scheduled for release today. Recall the index showed that conditions in the private sector deteriorated to a greater extent at the start of the year amid a second wave of coronavirus infections. Survey results showed that re-ductions in output and new orders gathered pace at the start of the year. The fall in activity was the fastest since last September and extended the current sequence of decline to 23 months. Employment fell at the slowest pace in three months, while further weakness of the Kwacha led to another increase in purchase costs, albeit the softest since last August amid a lack of demand for inputs. Supplier delivery times length-ened notably and to the greatest extent since last September as coronavirus restrictions contributed to delivery delays. Finally, business confi-dence remained relatively muted despite edging higher in January.
  • On the base metals front, Copper was underpinned during the Asian session building on the gains achieved yesterday. The red metal added some 1.39% on the day.
  • On the international front, News from the Senate is that the bill is being amended and tweaked to tackle some improved spending and in-vestment measures, but it appears to be drawing limited, if any support from the Senate Republicans that will collectively vote against the bill when it is eventually presented. It will mean that VP Harris will likely be drawn on to use her casting vote to pass the bill. As always, the strong-est criticism against the bill is that many of the spending measures have precious little to do with the pandemic. In their defence, the Demo-crats will see this as a useful economic stimulus tool which does not need to be directly related to the pandemic, but that is being used to undo some of the damage brought about by weak growth.
  • Fed officials have again reiterated their position that they will be patient in how they manage monetary policy through the remainder of the year. Most believe that the economy is far from reaching full employment and the economy needs all the assistance it can get. With the Fed’s mandate now allowing for greater flexibility in responding to inflation, a temporary breach of inflation will not necessarily encourage the Fed to start tightening unless it appears that the inflation episode could undermine the economic recovery.
  • Labour data comes back into the spotlight this morning with the release of the ADP figures which will precede the payroll figures on Friday. Following December’s loss of jobs, January’s print snapped back into positive territory as 174k additional payrolls were added, beating consen-sus expectations of 70k. This suggests the labour market is beginning to pick up steam as the vaccine rollout accelerates and the US economy emerges from a second round of pandemic-induced restrictions. A similar amount of jobs were likely added in February despite the higher than expected initial jobless claims in the first half of the month. However, the labour market recovery is trailing the broader recovery seen in other sectors. As such, the Fed is likely to continue its dovish rhetoric until substantial further progress is evident, while slow progress would underscore the need for fiscal support to the economy.
  • Shifting to the FX markets, as risk appetite has steadily recovered, so the USD has found resistance to tracking stronger. On the contrary, it has backed away from the highs seen yesterday and technically, indications are that it will retreat still further through the course of the next few trading sessions to settle back in its well-worn range which began at the start of the year. All eyes will now be on the labour data through the back-end of this week and developments in the Senate to drive some market reaction through the next week.
  •  The Kwacha meanwhile continued to sell off, reaching a fresh low. On a YTD basis, the Kwacha is  Africa’s second worst-performing currencies, down by over 3%. A shortage of dollars, deteriorating fiscal dynamics, and deeply negative real rates are some of the factors that have weighed on the Kwacha. Ultimately, unless debt is restructured and better managed, weakness may continue.

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Nicholas Kabaso

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