Africa’s second largest copper producer Zambia is still dealing with autopsy effects a change in leadership that has triggered a surge of confidence nodded by a dollar bond price rally in a 12% valuation appreciation in the last 5 days. President elect Hakainde Hichilema poised to be Zambia’s 7th Republican President has been dubbed a political risk hedge for the red metal producer fueling a bond rally that has Wall Street eyeing Kwacha bonds.

As Wall Street talks the Kwacha is walking, albeit at a faster pace with a 7.8% in gains to be the worlds best performing currency closing Thursdays trading at 17.400/17.450 in bid/offer over the last 4 days.

The positive sentiment has got the speculative dollar holders exit positions which has flooded the Zambian markets with foreign currency that has sent the Kwacha on a winning streak over the last 4 days.

FAIR VALUATION AND TECHNICAL ANALYSIS
Benchmarked against the fair value of the copper currency on a trade weighted basis at 15-16, the current exchange rate levels of 17.400/17.450 still reflect an undervaluation.

The move of the 50 day simple moving average below the 200 day simple moving average implies that from a technical analysis perspective, a death cross has actualized, suggesting that further Kwacha appreciation latitude exists and could be on the cards in the long term. This is opposite to a golden cross where the 50 day simple moving average moves above the 200 day moving average, which last occured in May 2018 and was a technical signal that the Kwacha would weaken in the long term, a move evidenced by the depreciation to 22.7.

From a medium-term 5 year Fibonnaci Retracement Analysis, taking into account a 5 year low of 8.76 and. 5 year high of 22.67, following the breach of the support level at 19.38 (23.6% retracement), the next support levels are at 17.36 (38.2% retracement), 15.72 (50.0% retracement) and 14.08 (61.8% Golden ratio retracement).

POST ELECTION BUMP BOND SALE NEXT WEEK
A week ahead, the Southern African nation has a bond sale which is forecast to attract immense participation from offshore players that will be seeking and hunting for yield. This follows the current state of the global economy with elevated inflation (effects from massive stimulus programs) and ultra thin treasury yields which has pointed money managers to emerging and frontier markets which Zambia is benefitting from. However the window is narrowing as the US Fed commences bond tapering to curb inflation effects in the US at the end of 4Q21.

While the Kwacha rally is a good economic stimulus for Zambia’s net import position, a super appreciation could hurt the export side. It is likely that the central bank will curb ferocious appreciations to optimize growth while keeping manufacturing for exports competitive. The fair value may potentially be a guide on a level to expect central bank intervention through USD purchases. The agriculture sector was key driver of the 1Q21 growth of 0.7% with 40% contribution leveraging off a weak currency, just as cement and sugar exports similarly raked in foreign exchange from the export market.

The Bank of Zambia will have its penultimate rate decision meeting commencing August 30 whose announcement will be made of the first day of September for which monetary policy tightening will be inevitable if the currency rally is to be sustained. Given elevated inflation at two decade highs, all odds point to policy tightening at reserve ratio level (and not benchmark interest rate) while the magnitude of adjustment will be lessened due to the levels the currency has scaled in strength to. The meeting will commence exactly 7 day after the special drawing rights (SDR) credits by the International Monetary Fund. This will shore Zambia’s reserves $1.3 billion higher.

Red metal prices will continue to signal improvement in cashflows into the public purse in mining taxation while aggressive steps towards sealing and Extended Credit Facility – ECF is the golden key to debt restructure which in turn should allow rating agencies to improve Zambia’s credit ratings.

By the Kwacha Arbitrageur, Cynical Investor and the Futuristic Africonomist

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