Macro Analysis /

Inflation fears intensify as oil prices surge, FX strategists see USD dominating

  • Forex: Reuters poll suggests that the US Dollar is set to dominate in 2022

  • Fixed Income: Inflation fears intensify as oil breaches the $82/bbl mark

  • Macroeconomic: Morocco’s economic outlook is prosperous

Kieran Siney
Kieran Siney

Head of African Markets

ETM Analytics
7 January 2022
Published byETM Analytics


Two sets of labour market data have already been released. The private sector ADP data beat expectations comfortably to the topside. The weekly jobless claims data disappointed slightly but remained in a broader improving trend. The stage is set for the all-important non-farm payroll data and the official take on employment. Investors are anticipating a rise in payrolls of some 400k, which would be almost double the previous reading of 210k. The ADP numbers suggest that the reading is conservative. However, the emergence of the Omicron variant has thrown this into disarray. It is unclear whether the effects of the Omicron variant will reflect strongly in the data, given that it is less severe and does appear to be signalling the beginning of the end of the pandemic as it steadily becomes endemic in the global population.

How rapidly the Fed tightens and whether this will have a big impact on employment is rapidly becoming a topic debated amongst Fed members. Although some feel that the Fed tightening is a sign that the economy is on a firmer footing and can absorb the tighter conditions, others believe that it poses a downside risk to employment and GDP growth. What is certain is that the ultra-loose monetary policy is playing an enormous role in asset price inflation which in time could lead to other forms of price instability and detract from financial stability more broadly. Normalisation is necessary and anticipated. The degree of the tightening is, however, up for debate.


Zambia: Zambia was a great bet for investors in 2021, with bonds, the kwacha and domestic stocks all recording massive gains on the year. Domestic stocks in particular performed exceptionally well with the Lusaka Stock Exchange finishing 2021 as the best performing stock market for the year. In US Dollar terms, Zambian stocks gave investors a return in excess of 90% as assets across the board rallied on the back of bets that the new government would right side the economy while at the same time putting Zambia back on a sustainable debt path. Heading into 2022, we remain bullish on Zambian assets. However, we are likely to see Zambian assets record the kind of gains seen last year.

SADC: The Southern Africa Development Community is set to hold an extraordinary summit of heads of state and government to review progress and mandate the SADC mission in Mozambique. Recall that SADC announced in mid-2021 a regional response to support Mozambique in its fight against terrorism and acts of extreme violence in the northern province of Cabo Delgado. The summit will, among other key issues, discuss support for the effective operation in northern Mozambique with the aim of restoring peace and calm in the region.

Kenya: A presidential spokesperson said that President Kenyatta and visiting Chinese officials together inspected the ongoing construction of the KES 40bn offshore Kipevu Oil Terminal, the largest of its kind in Africa. According to Reuters, the construction of the 770-metre-long jetty, now 96% complete, is wholly funded by the Kenya Ports Authority and implemented by China Communications Construction Company. When completed in April, the offshore facility will be able to load and offload large sea tankers carrying all categories of petroleum products, including crude oil, white oils and LPG. When operational, President Kenyatta said that the new offshore jetty would save the country in excess of KES 2bn annually in demurrage costs incurred by oil shippers, thereby contributing to a significant reduction in fuel prices.

Mozambique: The Board of Directors of the African Development Bank Group has approved a $47.09mn grant for the first phase of Mozambique’s Pemba-Lichinga Integrated Development Corridor, according to Reuters. The grant from the African Development Fund will help improve agricultural productivity and agribusiness development in the Niassa province by advancing institutional capacity, skills, and entrepreneurship to spur agricultural value chain growth.

South Africa: There has been a lot of head-scratching around why the ZAR has staged its recovery. One can try to retrofit reasons after the fact to make the move sound plausible, but in truth, it has caught and is catching a lot of investors by surprise. The fact that it has bucked broader emerging market trends makes it especially peculiar in that there has been no SA specific information or data that would warrant it.

Forex: Reuters poll suggests that the US Dollar is set to dominate in 2022

A poll conducted by Reuters showed that analysts expect that most currencies will struggle to make any material headway against the USD in the year ahead as monetary policy in the US is tightened. Reuters said in its report that almost two-thirds of the forty-nine foreign exchange analysts surveyed said interest rate differentials would dictate sentiment in major FX markets in the near term.

Reuters highlighted in the report that only two strategists were concerned about new coronavirus variants and the impact that it could have on the dollar. The majority of strategists said that volatility in FX markets would increase over the coming three months, with well above 80% saying so for both majors and emerging market currencies.

Looking ahead, the Fed has increased the pace at which it is winding up its asset purchase program. Moreover, it is widely expected that the Fed is likely to deliver three 25bps rate hikes this year, which would mark a significant shift in monetary policy following the aggressive QE that took place in 2020 and 2021. That said, while we remain bullish on the USD for now, we caution investors of becoming overly bullish on the greenback. If fundamentals reassert themselves, the wide US current account and fiscal deficit that the US is currently generating should become currency depreciative.

Fixed Income: Inflation fears intensify as oil breaches the $82/bbl mark

The strong rebound in international oil prices has triggered fresh inflation fears. Recall that fuel has been one of the main drivers of inflation in recent months as international oil prices surged from the record low levels seen in 2020, when the Covid-19 pandemic brought the oil market to its knees. For context, 0il is heading for a third straight weekly gain despite the fact that risk assets have had a turbulent time this week. Brent surged yesterday to over $82 per barrel as supply constraints among some key OPEC members have seen the market tighten.

Libyan production remains crimped by ongoing civil unrest, while Kazakhstan’s largest oil producer has had to alter output at its Tengiz field following protests in the country. As a result, it is looking very unlikely that OPEC+ will meet its goal of increasing output by 400k barrels a day through January, with the outlook for February not too much brighter in terms of production levels.

Demand for prompt barrels of oil has also been rising, which has seen the spread for the nearest dated contracts rise to around 75cents per barrel currently. This is its highest since mid-November, just before the Omicron scare roiled markets, and suggests that we could see prices rise back towards $85 per barrel in the near term. Against this backdrop, we expect inflation expectations to remain elevated in the coming months. Therefore, the topside bias in shorter-dated bond yields is expected to remain in place.

Macroeconomic: Morocco’s economic outlook is prosperous

Morocco continues to assert itself as one of the leading economic forces in Africa. In the summary of the economic situation, the High Commission for Planning said that Morocco’s economy is expected to grow by 4.9% in Q4 2021, adding that growth is expected to remain robust in the first quarter of 2022. The Commission said that the strong growth is mainly due to the improvement in the agricultural sector, which is seen expanding by more than 19%. Growth in the non-agri sector is estimated to come in at just below 3%.

The Commission said in the report that the tertiary sector is expected to contribute 1.5 percentage points to GDP, supported by the recovery of trade and public services activities. The secondary sector is also expected to continue its development, but at a slower pace than the previous quarter, with the sector seen contributing 0.8 percentage points with the manufacturing sector. The Commission indicated that construction activities are seen expanding by 6.75%, compared to 17.7%, in the previous quarter.

The International Monetary Fund meanwhile said in a report published last month that Morocco's economy is expected to grow 6.3% in 2021, one of the highest rates in the Middle East and North Africa region, before slowing to around 3% in 2022. The IMF said that the combination of a successful Covid-19 vaccination campaign as well as continued fiscal and monetary stimulus, the rebound of exports, buoyant remittances, and the robust harvest after two years of drought are underpinning Morocco’s economic recovery.