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Zambian Kwacha set to remain on the defensive

January 21, 2022by Nicholas Kabaso
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Local Market Commentary

  • Yesterday African Pioneer PLC announced that it had entered into an option agreement with First Quantum Minerals Ltd. In relation to four of its copper exploration licenses in Zambia. As part of the deal, First Quantum has the right to undertake exploration across African Pioneer’s licenses. If the exploration is successful, First Quantum may earn a shareholding of up to 75% in African Pioneer Zambia, subsidiary of African Pioneer and the holder of the licenses.
  • Industrial metals for the most part rallied hard again yesterday underpinned by supply fears in some of them while the macro driver remained Beijing moving to shore up its economy with monetary stimulus. The 3m copper benchmark finished the session 1.5% higher on the day while nickel closed 2.73% higher, touching the $24000/tonne mark for the first time in more than a decade. The supply of nickel remains tight with LME stockpiles falling for 56 days before stabilising yesterday. 
  • This morning we have the complex slipping in Asia as profit taking emerges as the markets turn to focus on next week’s US Fed meeting which is expected to bring with it further news of monetary tightening to temper rampant inflation pressures.
  • In the local FX market, the Zambian Kwacha remains under pressure at present, and this is likely to persist next week as demand for hard currency remains higher than actual inflows. As a result the local unit has started the year on the defensive and is currently ranked as the third-worst performing African currency against the USD, down by -1.74% on a month-to-date basis.
  • In the U.S., data released yesterday was a mixed bag. On the one hand, the jobless claims ticked up to show that Omicron has impacted. On the other, the Philly Fed index also improved. The latter may reflect the lagged effect of the general improvement in economic conditions that may soften through the Jan data, although for now, one can only take this at face value. With the next FOMC now in sharp focus, all this data will have a bearing on expectations, although the mixed bag of data yesterday will do little to change what the market has priced in concerning rate hikes. Today, the focus will turn to the leading indicators data for further guidance on the business cycle.
  • The U.S. Leading Economic Index rose by 1.1% in November to 119.9, above expectations, followed by a 0.9% increase in October and a 0.3% gain in September 2021. This sharp rise suggests the current economic expansion will continue into the first half of 2022. Inflation, continuing supply chain disruptions and the resurgence of COVID-19 pose risks to GDP growth in 2022. However, the economic impact of these risks may be contained and will allow for consumption and new investment to take place. The biggest positive contributor to the leading index in November was jobless claims, while the biggest negative contributor was average consumer expectations. With employment levels improving recently and concerns over COVID fading, there is room for the index to continue to rise over the coming months.
  • Finally, the U.S. is now firmly involved with its allies in the geopolitical developments between Russia and Ukraine. Together with its allies, the U.S. issued a very strong-worded warning to Russian President Putin that there would be severe consequences should there be any incursion. Russia, for its part, continues to contend that it has no desire to invade but will protect its borders given the rising threat of Nato. It is likely that Russia is simply flexing its muscles to use as leverage in any negotiations with Nato on its growing influence on its border.
  • The trade-weighted USD has taken a breather from recent gains this morning, as risk-off sentiment in the market triggered a slight pull-back in UST yields. Still, the greenback looks set for its best weekly performance in a month, as investors have dialled up bets on an aggressive Fed tightening trajectory ahead of next week’s policy meeting. Heading into the weekend, the USD may consolidate these gains, with investors cautious over what kind of forward guidance Fed Chairman Powell will deliver next week.

Rand and International FX Commentary

  • Overall, it has been a strong week for the ZAR. While it started the week on the defensive, it has turned around and gained appreciative traction through Wednesday and Thursday’s trade. The catalyst was the domestic inflation data that strengthened the argument for monetary tightening, and while inflation might be peaking, it does appear that containing inflation will require more effort, and inflation expectations may prove to be more buoyant than initially anticipated.
  • As we wind down the week, there is not much in the way of data to focus on other than the US leading indicators data, which is not traditionally market moving. Domestically, the focus will be shifting strongly towards the SARB’s first decision of the year, where another 25bp rate hike is priced in. Although the inflation data came in higher than anticipated, it is unlikely that the SARB will move more aggressively than that, given the weak state of the underlying economy and the persistently weak credit cycle, which will help contain inflation going forward.
  • Lest we forget, this latest inflation episode has not resulted in the inflation rate punching through the upper limit of the 3-6% inflation target range. There is no reason to panic as the rate hike cycle is underway. Internationally, there are also signs that the inflation spike is near or at its peak and that it will also moderate through the course of 2022. The conclusion is that the SARB will continue to shift incrementally and take on board the latest data as it arrives to gauge whether it has done enough to contain inflation or whether it needs to do more.
  • What is clear is that the SARB will support the ZAR. Whether that is explicitly targeted or implied is less important. What is important is that financial markets are rewarding more conservative central banks with a more stable or appreciating currency which will also help contain inflation, especially in the face of rising commodity and energy prices. Although the ZAR has retreated off its best levels this morning, the appreciative trend remains intact on the back of a recovery in the USD overnight. Some consolidation below the 15.3000 mark is anticipated to round off a constructive week ahead of the weekend.

Nicholas Kabaso

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