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ZMW closes as best performing African currency in July

August 3, 2021by Nicholas Kabaso
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Local Market Commentary

  • Zambian financial markets will reopen today, having been closed yesterday on account of the Farmers day public holiday.
  • In a statement released yesterday, the Health Ministry said that schools will reopen for examination classes following a reduction in coro-navirus infections. Specifically, school for examination classes will reopen on August 5, instead of the earlier announced August 16. How-ever, the statement said that casinos and nightclubs, as well as gymnasiums, will remain closed for the next 21 days while restaurants, bars, and taverns will be operating on a take-way basis during the same period.
  • Ahead of the upcoming general elections, President Lungu has deployed the military and other security agents to join the police in main-taining law and order following the killing of two supporters of the ruling patriotic front. According to President Lungu, “I’ve allowed other wings of the defence force to join the police in maintaining law and order in those points where we have experienced violence.” Note, reports of clashes between supporters of the ruling Patriotic Front and the country’s main opposition United Party for National Develop-ment, have intensified as the country nation’s general election draws nearer.
  • The month of July was a stellar one for the Zambian Kwacha as it rallied to close as the best performing African currency against the USD. The ZMW gained over 18% throughout July to trade at a multi-month high of below 19.200. Furthermore, the gains in July saw the ZMW erase its earlier losses this year and become Africa’s second best-performing currency on a YTD, up by nearly 11%. Note only the Mozam-biquan metical has fared better than the ZMW according to Bloomberg’s basket of 23 African currencies against the USD. 
  • The notable ZMW strength in July was underpinned by changes in the actual supply of foreign exchange and expectations of further im-provements in supply associated with the forthcoming IMF Special Drawing Rights (SDR) allocation, improved prospects of a formal Ex-tended Credit Facility (ECF) programme with the IMF, as well as buoyant copper prices. Note, the last time the ZMW had recorded a monthly gain against the USD was in June 2020. 
  • As alluded to in recent commentary, while the recent correction in the Kwacha has been justified, it, however, seems undone when look-ing at our in-house FX forecast model. That said, room for further appreciation does exist in the event that an IMF deal is secured, as fiscal challenges have been a major detractor for the currency’s attractiveness. Moreover, the broader fundamental outlook for copper re-mains bullish, which should provide further support for the Kwacha.  Shifting to this week, the Kwacha is expected to remain on the front supported by increase foreign exchange flows from mining taxes and offshore investors buying government securities.
  • 3m LME Copper finished the session mildly lower yesterday as the strike action in Chile prevented the fall becoming too acute following unimpressive Chinese PMI numbers.
  • This morning we have the base metals counters locking onto headlines which are reporting on the surge of the Delta COVID-19 variant. 3m LME copper has fallen by some 0.3% at the time of writing to $9670.00/tonne while Nickel is currently down by some 0.75% at $19370.00/tonne. 
  • Internationally the quasi cold war between Washington and Beijing continues. The Chinese government has according to three US based sources issued new procurement guidelines which erect further barriers for foreign suppliers. Hundreds of items from x-ray machines to magnetic resonance imaging equipment have been cited as requiring 100% local content. The issue is that when China joined the World Trade Organisation, it agreed not to issue such directives, the procurement instruction also violates the spirit of “Phase One” of the trade deal with the United States.  Beijing has not released the document publicly and has not responded to queries on it.
  • Keeping with Asia, the tech giant Tencent has crashed this morning with the shares falling by their most in over a decade. This comes post the Chinese state media branding online video games as “spiritual opium” raising fears that the tech sector is squarely in the regulators crosshairs and that sharp controls are almost certainly in the pipeline. The stock fell by more than 10% in morning trade wiping some $60 billion off its market cap. Now the relevance to local markets is not direct, however it does impact sentiment and make investors more cautious across the emerging market spectrum.
  • The dollar has effectively stalled this morning as it pivots around the 92.00 handle with the market assessing the impact of the Delta vari-ant surging across the Southern United States and the lack of a timeline regarding the infrastructure bill. The big focal point for the Asian session has been the Aussie dollar which is currently well bid following an a surprise move by the Reserve Bank of Australia by not reserv-ing its decision to taper bond purchases. The tone of the RBA statement was upbeat and tended to look past the current COVID lock-down. In terms of the euro, not much in the way of interest to take the single currency in either direction with option strikes at 1.1880 and 1.1900 keeping a lid on the move higher.

 

Rand and International FX Commentary

  • While the ZAR backtracked on Friday, declining 0.35% against the US dollar to close at the 14.6000/$-handle, the local unit still managed to secure a weekly gain of 1.70% as it was aided by a weaker USD and the US Fed’s dovish policy announcement. Despite Friday’s lift for the USD, the trade-weighted dollar index, known as the DXY, had retreated in the previous four days, which will likely have investors ques-tioning the greenback’s outlook going forward.
  • The ZAR eventually capitalised on dollar weakness over the week while shrugged off stronger trade balance data on Friday. However, be-ing data for June, the limited reaction was understandable given the shock to the economy from riots and looting experienced in July. Nevertheless, the trade data highlighted SA’s current robust trade dynamics, with the surplus rising for the second month to a record high of R57.68 billion. SA’s outbound shipments are supported by the persistent increase in global commodity prices while weak domestic de-mand dynamics weigh on imports.
  • Meanwhile, June’s monthly budget balance swung back into surplus, coming in at R63.15 billion. As a result, the government recorded its smallest budget deficit in the first quarter of the fiscal year since 2015-2016. The improvement is primarily due to higher tax intake on ac-count of greater mining company revenues due to surging global commodity prices. Given the cyclical and non-permanent nature of the improvement, deficits may remain the status quo for the foreseeable future should the government fail to follow through on touted re-form action. The budget will thus remain heavily indebted and the fiscus vulnerable to further pressure from many of the state’s ailing en-terprises. However, there are those in government offering solutions for some SOEs. Commenting on Eskom on Friday, Deputy Finance Minister Masondo said that he does not support moving Eskom’s debt to state books, but he did note the sovereign’s involvement in re-solving the SOE’s debt is needed. The deputy FinMin also proposed listing the power utility or selling a stake in the company to foreign in-vestors to help ease financial strain. Should these solutions go unconsidered and thus unexecuted, we will likely see the fiscus and tax-payers continue to take the strain. 
  • As for the ZAR, despite last week’s gain, which was mainly due to a single day of dollar weakness, July ultimately brought a second con-secutive monthly loss as it fell 1.95%. While growth prospects have taken a hit, which has equally put a spanner in the works for govern-ment’s fiscal consolidation efforts, trade dynamics should offer the local unit some resilience for now. However, as we saw on Friday, a record trade balance failed to stave off the ZAR’s June losses which amounted to 3.85%. In the spot markets, the US dollar appears to be steadying but remains at crossroads as it hovers near two-week trade-weighted lows. The day thus far has seen EM currencies slightly pressured, with the ZAR falling alongside the laggards. The day ahead sees Naamsa vehicle sales and the Absa manufacturing PMI for both for July. The data will show an expected dip due to July’s civil unrest and thus will not likely have significant market-moving potential. Meanwhile, the global stage readies itself for US employment data due at the end of the week, which could counteract the Fed’s recent dovish communication, should July’s hiring prove more robust than expected. 
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Nicholas Kabaso

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