Amidst market hype after an aggressive winning trajectory for 24 consecutive sessions, the copper currency, the Kwacha on July 28 showed technical signs of resistance and potential reversal as it unroiled some of its gains seen in the last few weeks. From all time lows of 22.6/22.8 a fortnight earlier, the Kwacha rallied to slightly under 18.9/19.1 after which the local unit has started to marginally lose bullish momentum closing yesterdays trading at 19.1/19.5.
Offshore players were seen in the market buying dollars to hedge risk on bond investments by taking profit on the bond trades on the back of on uncertainty.
The Kwacha has taken a cue from the recent central bank intervention through dollar sales on the open market however the demand side of the market remains suppressed as the red metal producer grapples with pandemic effects on the business ecosystem. In a Bank of Zambia Monetary Policy – MPC communique on July 23, the central bank has sold foreign currency in the market supplied by the improved mineral royalty from higher metal prices and greater flows from offshores seeking yield in government securities.
However analysts have sighted that rapid appreciation for a net importing nation as Zambia signals anaemic demand side linked to a weaker growth momentum generally. Zambia’s earlier actions to accept mining taxes in dollars paid to the central bank directly sucked 55% of activity from the currency market and as such has adverse impact on the foreign exchange currency market which remains highly elastic to any currency conversion hypes as these observed over the last two weeks. It has been argued that the greatest dollar demand for Zambia over the least tow years has been for government business such as agriculture input, petroleum and debt service obligations which remain the key driver of depreciation in the period.
According to data complied from the central banks website 44.0% of commercial banks recorded appreciations while 32.0% had weaker streaks with 25.0% unchanged rate positions seeming to suggest signs of resistance levels.
Speculation in the currency market has continued as the retail side ponders when to buy dollars and for those holding dollar positions, when to exit as the cloud of uncertainty persists. The market is showing signs of dollar buyers seeping into the market nonetheless. Currency direction going forward will be determined by whether or not the central bank intervenes but in the absence of that, it is unlikely that the rally will further.
The Kwacha Arbitrageur