The MinFin in Africa’s red metal hotspot has attributed the recent Kwacha bulls against the dollar to increased mining flows as rising red metal prices and production, improved sentiment increasing offshore appetite for Kwacha government securities and central bank intervention as key drivers of the recent bullish streak the copper currency has experienced.
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According to a press release from the MinFin, some of the major drivers of the continued stability and recent appreciation of the Kwacha are improved foreign exchange flows from the mining sector in view of the strong recovery in copper prices and production has led to significant expansion in the trade balance estimated at $1.9 billion in the period between January to May 2021 compared to $576.8 million a year ago same period. other drivers cited in the note from the MinFin include significant flows from non-resident investors seeking to purchase government securities, evidenced by the oversubscription at 116% in the bond issuance held today which has bolstered liquidity in the foreign exchange market and has subsequently led to the substantial reduction in the hitherto excess demand; The central bank has scaled up market support through dollar sales on the open market supported by improved flows from the mining sector.
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The MinFin additionally pointed to confidence boost in the market following the announcement by the Washington based lender the International Monetary Fund – IMF recent Special Drawing Rights (SDRs) proposal to its members which Zambia is set to benefit from to the tune of $1.3 billion. This coupled with the recent gold purchasing interventions following which $22 million was added to reserves in bullion has continued to drive positive sentiment.
While other schools of thought have questioned why the MinFin is explaining currency pricing, a central bank mandate, MinFin press release did not specify the quantum of intervention of the Bank of Zambia in the market. The demand side of the foreign exchange market has remained subdued by the COVID pandemic while pipeline demand has significantly been absorbed addressing dollar scarcity concerns earlier experienced in the year.
The copper currency, the Kwacha has been on a 7- day rally closing July 23’s trading at 20.3/20.7 from July 14s 22.45/22.90 levels, a 9.5% appreciation. In less than 20 days, Zambia, as part of Africa’s democracies that are heading to the polls, will seek to elect national leaders to serve for the next 5 years. The copper producer remains in the labyrinth of rising rising inflation to 19 year highs of 24.6%, debt restructure amidst a series of coupon defaults on dollar bonds in a COVID pandemic.
The Kwacha Arbitrageur