Detented dollar demand and conversions for miners perks in ‘thin trade’ support copper currency bulls

With little dollar appetite for energy and agriculture funding which have been the biggest drivers of market appetite, dollar conversions by miners to meet monthend perks have extended Kwacha bulls into Christmas eve. Opening at 13.25/13.45 on the interbank on 24 December, the Kwacha rallied to close at 12.95/13.15.

A volatile African currency so far. The Kwacha has been very volatile in the year sliding to record lows of 15.75 for a unit of green back to bullish streaks pushing the red metal currency to 12.45. With falling reserves to decade lows in anemic import cover of under 1.6 months. The Zambian financial markets have been very highly susceptible to external shocks which its central bank has had very little ammunition to intervene through dollar sales on the open market because the Bank of Zambia has been the largest off taker of dollars in its quest to shore up foreign currency reserves.

Contractionary monetary policy. The central bank has effectively tightened monetary policy through ebbing the benchmark interest rate 175 basis points higher to 11.5% in two rate decision meetings for May (50bps) and November (125bps) while widening the liquidity spreads the BPR an additional 1,000bps to 27% on emergency funding to commercial banks. As if this was inadequate because the currency rout persisted, the BOZ on 09 December hiked the cash reserve requirement 400bps to 9% mopping K1.6billion from circulation that successfully tamed the currency slide, but at the expense of private sector growth.

A view on currency. Medium term forecast for currency will be themed by dollar funding needs that could further shift equilibrium higher as activity creeps back after mid-January 2020. The Kwacha January effect historically in similar market conditions manifests in a yield rush on government securities pushing interests rates higher. With a cash tight position into Christmas, it is highly unlikely that Friday 27 December ultimate fixed income sale of the year will have adequate purchasing power.

Asset sell off pressure is projected to widen as sovereign risks deteriorate evidenced by Fitch affirmation of foreign currency long term issuer ratings and Zambia’s debut on the Africa Development Banks (AfDB’s) watchlist for $1.4million. 

The Kwacha Arbitrager