In the week beginning December 05, the odds of the copper currency, the Kwacha, rallying is higher given the outcome of the IMF Staff Mission agreement with Zambias MinFin. This however will be supported by an array of factors key of which include increased liquidity flows from offshores that still seek yield in light of global record high inflation in an ultra thin treasury rate environment and general flows on the market as sovereign risk sentiment for the copper producer improves. Dollar returns for investment in Kwacha assets remain higher in real terms than in US treasuries making government securities still attractive. However the current scenario could be shortlived by a tapering program on the horizon as the US Fed reigns in on inflation.
The Kwacha has on a trade weighted basis deviated from the the expected optimal level given the current inflation in double digits zone weighed by economic growth pressures in a net import environment. Growth in Zambia remains positively correlated to currency depreciation. The forecast flows given the exchange rate has some latitude to rally within the 15.5 to 18.5 range for a unit of dollar which is expected to actualize between year end of 2021 and 1Q22 as a vivid position on debt restructure emerges.
“A currency blip and retrace is eminent especially supported by offshore yield hunters in the last auction of the year which could trickle into 1Q22 when there’s more clarity about debt restructure after the bailout package is sealed,” Nikiwa Capital Chief Analyst Munyumba Mutwale said in an emailed note.
Other drivers of Kwacha strength will include mineral royalties that remain fairly strong given healthy metal prices on the London Metal Exchange (LME) despite the dollarisation of mining taxes reducing foreign exchange activity on the open market which many analysts are calling for reversal.
A stronger currency outlook will support more bullish private sector pulse which headlined 51.8 as measured by the Purchasing Managers Index (PMI) for November. This was achieved through reduced input inflationary pressures. On the downside, trade imbalances remain the biggest threats to currency stability as the Southern African nations net import position continues to exacerbate dollar demand.
The Kwacha Arbitrageur