In the week beginning the 24 May, the Kwacha is expected to extend its bulls, while lack of appetite for long dated government securities could result in dismal outcome in Friday’s 27 auction. Higher inflation readings are also expected this week.
Kwacha Bulls. The currency in Africa’s copper producer is expected to be supported by corporate Dollar conversions to raise local currency to meet month-end payrolls. The copper currency remains vulnerable in a disease pandemic era weighed by feeble reserves at $1.37billion. Outside this window (after month-end) the currency will be vulnerable to increased demand from central bank purchases and petroleum sector funding in addition to debt service. Muted activity has constricted Zambia’s imports thereby easing dollar demand. We expect the Kwacha to reverberate within 18.00-18.25 in the short week ending 29 May.
Anemic Appetite for Bonds. The Bank of Zambia will offer K1billion worth of new bonds in this weeks Friday debt sale. We are torn between liquidity and actual appetite for longer dated paper for which we are more skewed towards anaemic appetite. Risk skew for Zambian government securities is towards shorter dated higher yielding paper – treasury bills than long date fixed income – bonds. This is driven by the outlook of the Zambian economy amidst rising debt and amplification effects due to disease pandemic with bleak success of a potential IMF bailout or at minimum COVID relief. This precipitated investment inertia in long dated bonds. The market could see liquidity housed in the 2-3year bucket on account of duration risk. We forecast a dismal outcome in Friday’s sale. Of the one yard on offer we attach an 80% likelihood that the BOZ will have proceeds not exceeding K300million – K450million.
Inflation bears. Consumer Price Index – CPI for inflation is expected higher 50basis points to 16.2% to be announced by the Zambia Statistics Agency – ZSA as disease pandemic effects sting the business ecosystem impacting the non food security side of the CPI. The inflation environment remains elevated as COVID effects deepen. The central bank is determined to contain inflation within the 6-8% target while addressing growth. While some of the stimulus measures are deemed inflationary and will not support the currency the Bank of Zambia remains committed to curbing inflation as it remains a ‘bigger evil’.
Zambia joins the rest of Africa celebrating Africa day on Monday 25 May which is a Kwacha holiday.
The Kwacha Arbitrageur