KWACHA PERFORMANCE: The copper currency remains firm at 12.51 for a dollar unit from previous session of 12.55. We remain optimistic that the Kwacha will remain vulnerable to further rallies driven by the short cash market positions which have triggered central bank presence in Open Market Operations (OMO), injecting liquidity just to plug the lacuna. With the tax season open to the 16 July, the market is absorbing Kwacha at a fast pace with a flurry of dollar conversions to raise Kwacha funding for players long foreign currency. Some analysts view the recent rally as unsustainable and artificial given the current fiscal posture of the sovereign. The Kwacha crossed its 100 day moving average earlier in the week signaling greater likelihood of further rallies to the projected 12.45 levels given its vulnerability. The supply demand side is weighed in part by the central banks appetite for dollars to shore up reserves which have fallen to a decade low of shy of $1.4 billion.
THE WEEK AHEAD: The Bank of Zambia will be offering K950 million in short dated treasury assets which we forecast will be undersubscribed given the stock of cash in the market competing for tax absorption. Latitude for yields to widen higher is narrow and highly likely the curve will be unchanged at current levels. With uncertainty in the fiscals the market prices in appetite for shorter than 1 year tenors as was seen in the last treasury bill auction. The global fundamentals given US Fed rate cut expectations play a key part in determination of appetite for Kwacha assets especially that real government security yields (after withholding tax) are spreads below Non deliverable forward and swap yields making them slightly less attractive impacting demand.
EURO BOND PERFORMANCE: With riskier asset demand stronger pricing in a 25bps rate cut, credit default spreads on euro bonds continue to narrow across Sub Saharan Africa (SSA) with Zambia’s 2022 rallying 28bps. We expect a reversal in today’s trading after the markets fully price in the strong core US inflation that dented expectations of a US Fed rate cut.
INTERNATIONAL
DOLLAR PERFORMANCE: The dollar has regained traction following stronger inflation data. US annual inflation slowed 1.6% from 1.8% though its core inflation that excludes food and energy rose to 2.1% against what 2% Analyst’s forecast representing a 0.3% jump. This dented expectations that the US Fed would definitely be slashing rates either by 50bps or 25bps as was discussed especially after the Dovish sentiments by US Fed Chair Jerome Powell in his testimony to Congress as he gave his half year Economic and Policy Outlook. 10 year treasuries rose 8bps higher overnight to 2.134% while the 30 year treasury auction was dismal.
COMMODITIES MARKETS: Brent was 37cents up to $66.89/bbl. as WTI US futures rose 34cents to $60.64/bbl. supported by a slash in output in the Gulf of Mexico where its oil producers face a tropical storm that has shorted supply.
BASE METALS: Metal markets are in tight trade as investors await release of China trade data today. Copper was steady at $5,967 a metric ton on the London Metal Exchange – LME.
BOEs FINANCIAL STABILITY REPORT: Bank of England’s Mark Carney reported that British banks remain well capitalized to absorb Brexit risks though he clearly does highlight that a disruptive exit from the Euro will cause major turbulence for financial markets. He clearly distinguishes between financial and market stability saying that the two are not the same. Carney cited cognizance of Brexit and the trade war as the top two global risks in addition to geopolitical tension in the middle east.
Compiled by Kondwani Phiri