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ZMW underperforms regional peers

March 9, 2022by Nicholas Kabaso
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Local Market Commentary

  • When looking at currencies in the Southern African region tracked by ETM against the USD, it is evident that the South African Rand (ZAR) has outperformed its peers on a year-to-date basis. The ZAR (+4.33%) has been the standout performer and is also ranked the second-best African currency among those tracked by Bloomberg. Underpinning the ZAR’s performance has been strengthening terms of trade over Q4 of 2021 and into 2022 as commodity prices rally. With higher commodity prices bolstering SA’s terms of trade, the ZAR remains a good hedge against the Russia-Ukrainian war. Therefore, while it may seem obvious at face value that the ZAR should depreciate due to a rotation from risk, foreigners may continue to use the local unit as a good proxy for commodity exposure, and the ZAR may continue to remain resilient.
  • The Botswana Pula (BWP) and the Mozambican metical (MZN) have also advanced along with the ZAR. While the latter has extended gains from 2021, it is currently trading near its fair value, suggesting that room for a meaningful appreciation is likely limited going forward. The MZN is expected to remain range-bound in the months ahead as rising aluminum and coal prices and rising liquefied natural gas exports will offset the effect of short-term sentiment stemming from Russia’s invasion of Ukraine. That said, it is worth noting downside risks exist amid persisting security threats and a fragile fiscal position.
  • Bucking the broader appreciation trend in the Southern Africa FX basket has been the Zambian Kwacha (ZMW). The ZMW is also the second-worst performing African currency on a year-to-date basis and has erased some of last year’s impressive gains. Dollar liquidity challenges have weighed down the Kwacha. With demand for hard currency outweighing supply, the bearish bias is expected to persist in the near-term. Last year’s ZMW rally was in part driven by sentiment, and economic fundamentals remain the same at present. Therefore, the bullish copper outlook notwithstanding, further room for appreciation will likely depend on the new government making significant headway in implementing the required economic reforms and addressing the existing structural challenges.
  • Yesterday was a wild ride for the base metal markets. The London Metal Exchange was forced to halt trading in the nickel pit and cancel the days trades following a massive price spike which caused the metal to double to over $100000/tonne. The surge was blamed on short covering by one of the world’s top producers of the metal.
  • Reuters reported – China’s Tsingshan Holding Group, one of the world’s top nickel and stainless steel producers, had been building a short position in nickel since last year, betting prices would fall, three sources familiar with the matter said. Prices rocketed as Tsingshan bought large amounts of nickel to reduce those short bets and its exposure to costly margin calls, they said.
  • The US together with the UK have announced import bans on Russian oil. Due to the relatively small amount of imports, these countries can. Europe cannot. In the process, the announcement helped to boost oil prices still further with OPEC indicating that as a bloc, it would not be able to make up Russia’s shortfall. A global inflation shock will follow as long as oil prices remain at these elevated levels, leaving central banks with a difficult choice of whether to respond to the higher inflation, or to focus instead on the weaker growth.
  • After a solid bull run, the USD appears to be taking a breather. A record trade deficit would’ve been a wake-up call, but there is also likely to be some repositioning ahead of the ECB decision and statement tomorrow, although for the most part, investors are anticipating that the central bank will prioritise growth and default to delaying rate hikes. Nonetheless, the USD may be in for a period of profit taking, after a phase of risk-induced appreciation.

Rand and International FX Commentary

  • As politicians engage in virtue signalling, the financial market response holds real consequences that ordinary households will have to live with. The US yesterday decided to ban the importation of Russian oil, and US President Biden was sure to leverage off that as much as possible. However, the decision affects just 3% of US crude oil imports and just 1% of crude oil processed by oil refineries. The UK has done the same thing, but again, affecting just 3% of their oil imports. Neither one was a difficult decision to make, and the ultimate impact on Russia is minimal. 
  • Scroll across to Europe, and the picture is very different. They may try to wean themselves off Russian energy, but at best, they will be able to reduce their purchases by somewhere between a half and two-thirds by the end of the year, and that assumes a concerted effort to do so. In the interim, oil prices drift back above $130pb and will hold severe consequences for many households looking to work from home once again, but for different reasons.
  • South Africa, meanwhile, will have to manage the impact of the rise in coal prices. On the one hand, this is excellent news for the country as coal prices have risen even faster than oil prices. On the other hand, it hurts Eskom, and it is unclear whether SA can take advantage of the favourable market conditions. Coal prices may have boosted SA’s terms of trade and should give SA a leg up. However, SA miners are unable to export such bulk minerals efficiently. SA’s ports have turned into export blockages. An excellent opportunity to boost SA’s growth and resources industry may go begging if the throughout of our ports cannot cope with the demand. Data from the Richards Bay Coal Terminal shows that coal export volumes in 2021 were the lowest in 25 years. Another disastrous SOE failure of Transnet and the port negatively affects the entire country.
  • While the impact of this war continues to influence commodity prices from grains, through to PGMs heavily, and other industrial minerals and energy, SA will not receive the full benefit. Once again, poorly run SOEs stand in the way of a significant windfall. One can only speculate on how much stronger the ZAR might’ve been if the country could export without the port blockages. It would’ve helped keep SA inflation in check, and the SARB would’ve been under less pressure to respond with hikes. In the end, SA’s exports will still benefit from the high prices, but the volumes are not what they should be. The ZAR may enjoy some support but could’ve enjoyed even more.

Nicholas Kabaso

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