GLOBAL
It was interesting to note the behaviour of the trade-weighted USD yesterday. It was unable to sustain its intra-day surge. Ahead of the FOMC statement, there is a lot of hawkishness already priced into the USD, and it is far from guaranteed that some hawkish comments on their own will be enough to drive the USD to fresh highs. The price behaviour suggests there is some apprehension, which might also point to a slight reduction in overall levels of risk aversion and a reduced need for rotation to safety.
In the commodity space, it was a mixed bag for the industrial metals complex yesterday. Nickel continued to shed ground while copper got a foothold and managed to finish the session in the green. This morning we have witnessed the red metal pivoting around the $9800.00/tonne level as investors adjust expectations and positions ahead of the all-important Fed announcement on rates and monetary policy in general later this evening.
AFRICA
Mozambique: Today, the Bank of Mozambique is likely to hold its benchmark interest rate a year after surprising with a 300bps hike to ensure a durable economic recovery. Policymakers are expected to maintain the current monetary policy stance for the foreseeable future as the central bank sees inflation, which slowed for the first time in six months in December, remaining below 10% in the short to medium-term, supported by the stabilisation in its currency.
Kenya: The Central Bank of Kenya will also deliver its latest verdict on rates today. Policymakers are expected to keep borrowing costs unchanged for a 12th consecutive meeting after inflation softened to an 11-month low in December, allowing the real rate to widen and the economy to recover. However, policymakers will be cognizant that inflation risks are tilted to the upside against the backdrop of tightening global monetary policy conditions.
Nigeria: Nigeria plans to amend its newly-signed oil law by asking parliament for an 18-month extension to the current fuel subsidy. Speaking to reporters, Minister Timipre Sylva said, “ it has been agreed that the implementation period for the removal of the subsidy should be extended.” The bill signed last year in August by President Buhari contains a provision for the fuel subsidy to be eliminated within six months. However, with presidential and legislative elections only 13 months away, there appears to be a reluctance to remove the costly subsidy.
Uganda: Uganda’s trade deficit narrowed further in November, coming in at $314.6mn from $221.7mn in the month prior. The widening of the trade deficit resulted from an increase in the import bill, which more than offset the increase in export receipts during the month. Specifically, Uganda’s import bill increased by 25.2% to $639.01mn in November following an increase in import volumes. Meanwhile, exports increased by 12.4% to $324.5mn, largely due to increased export earnings from sugar and coffee. From a currency perspective, a widening trade deficit poses some risks to the Ugandan Shilling’s resilience going forward.
Uganda: Data from the Finance Ministry showed that Uganda’s first half 2021-22 revenue was 8% below target. Domestic revenue collection from July 1 through end-December was UGX 10.2trn against a target of UGX 11.1trn, mainly due to the effects of the coronavirus pandemic on the economy and delays in the implementation of some of the planned tax measures for the financial year 2021/22. Meanwhile, December tax revenue was UGX 2.35trn, missing the target by UGX 181.9bn. This was mainly on account of underperformance in direct taxes which more than offset the surplus registered in taxes on international trade collections.
Zimbabwe: Central Bank Governor John Mangudya forecasts gold production to rise by as much as 35% this year with incentives given to small-scale miners expected to shore up deliveries. According to the governor, authorities are targeting around 35-40 tons of gold, having recorded an increase of 55% to 29.6 tons in 2021. The incentives include paying on time for timely deliveries and the removal of taxes for small-scale miners. Increasing gold production will benefit Zimbabwe, given it is a major source of foreign currency revenue.
Mozambique: Citing preliminary information, authorities yesterday reported that Tropical storm Ana has killed at least three people in Mozambique and Malawi after making landfall on Monday and bringing heavy rains and strong winds. In recent years, severe storms and cyclones have repeatedly struck Mozambique and other southern African countries that have destroyed infrastructure and displaced large numbers of people. Mozambique’s disaster institute forecasts that as many as 500,000 people could be affected by Ana, although they said it had weakened from a “moderate tropical storm” into a “tropical depression”. Meanwhile, the World Food Programme has raised concern that the heavy rainfall and flooding during the agriculture season could lead to harvests being lost, causing a substantial rise in food prices. A rise in food prices could further contribute to inflationary pressures.
Forex: Angolan Kwanza strengthens further on the back of Fitch’s rating upgrade
Fitch’s recent rating upgrade of Angola’s sovereign credit rating to B- from CCC previously with a neutral outlook has provided an additional tailwind for the Angolan Kwanza (AOA) at the start of the week. Yesterday, the AOA firmed by 0.18% to close at more than a 21-month high, just shy of the 533 mark. The AOA’s advance further added to month-to-date gains of 4.26%, which have seen the local unit rank Africa’s as the second-best performing currency against the dollar amongst those tracked by Bloomberg. Only the South African Rand (+4.62%) has fared better.
Factors such as elevated oil prices and improving fiscal dynamics, which have led to positive credit rating actions, have underpinned the continued strength of the AOA at the start of the year. Last year, the AOA was ranked the second-best performing African currency against the dollar, recording its biggest gain since 1999. In addition to the factors mentioned above, a hawkish central bank and rising foreign exchanges reserves also supported the AOA.
Looking to the year ahead, the outlook for the AOA remains bullish, with Fitch solutions recently projecting the currency to firm by 15% in 2022 on the back of high oil prices and improved production. That said, it is worth noting that a deepening negative real rate as inflation continues to accelerate could detract from the resilience displayed by the AOA.
Fixed Income: Fixed income markets fixated on the FOMC rate decision today
The major risk event for the month is finally upon us, with the Federal Reserve set to deliver its rate verdict this evening. While the actual rate decision is expected to be a non-event with the Fed seen leaving rates on hold today, the rhetoric and forward guidance used in the policy statement will define the direction of financial markets going forward.
Fed funds futures show the market is pricing in a 25bps rate hike in March, the first of at least three hikes expected for the year. Market expectations align with the forward guidance provided by the Fed with the dot plot indicating that policymakers won’t hike rates until it has wound down its asset purchase program. Note that some market analysts expect that we could see as many as five rates hikes this year as policymakers look to rein in inflation.
On the back of mounting inflation and, in turn, interest rate expectations, yields across the US Treasury curve have notched higher in recent weeks. For context, the yield on the 6 T-bill has risen by around 25bps since mid-December. The rise in US Treasury yields and shift in rhetoric has come as a headwind for emerging market bonds.
To display this, we look at Bloomberg’s Emerging Market USD Bond Total Returns Index, a proxy for the performance of EM bonds. The EM bond index has plummetted 2.66% since the start of the year, reaching its lowest level since July 2020. Looking ahead, with inflation risk skewed firmly to the topside amid mounting commodity price risks related to the ongoing energy crisis in Europe, sustained supply chain issues, and the risk for more aggressive monetary policy tightening, the near term outlook for EM bonds is bearish.
Macroeconomic: Central Bank of Nigeria leaves rates on hold despite soaring inflation
While most of the world has changed its tune in terms of monetary policy, a number of African country’s, including Nigeria, have maintained their accommodative policy stances as they look to continue supporting their respective economic recoveries from the pandemic induced collapse. Yesterday, the Central Bank of Nigeria’s Monetary Policy Committee voted to leave all policy parameters constant.
The CBN said in its policy statement that maintaining the current policy stance will enable the continued permeation of current policy measures in supporting the recorded growth recovery and further boost production and productivity, which would ultimately rein in inflation in the short to medium term. It was a unanimous decision to leave the Monetary Policy Rate at 11.5%.
It is worth noting that the MPC dropped the option of tightening at yesterday’s meeting given the fragile state of the current GDP growth rate and potential external and domestic headwinds confronting the economy. The central bank said that tightening could counteract the CBN’s credit expansion motive as a necessary condition for improved economic growth and employment generation.
While the central bank made a solid argument for leaving rates on hold, we remain of the view that a gradual tightening in policy would be a more prudent option given that inflation is buoyed well above the central bank’s inflation target and inflation risks are skewed to the topside. This comes against the backdrop of tightening global monetary policy. With that said, we expect that the CBN will be forced to tighten policy in the months ahead.