Exchange Rate Analysis by Kampamba Shula

US Dollar Exchange Rate

Ever since the Kwacha began rebasing on 1st January 2013, it has experienced volatile trades throughout the month of January.

The week from 7^th January to 11^th January showed some volatility (See Graph) with an upper limit of 5.35 and a lower limit of 5.19.

 

The second week from 14^th January to 18^th January had low volatility as the fundamentals began to settle in and sentiment was positive towards the Kwacha.

The Third Week from 21^st January to 24^th January had noticeable volatility especially on the 22^nd on which we first so a high of 5.39 which gave us an indication that the Dollar could cross over to the 5.4 levels.

 

Last week I predicted the dollar would maintain the 5.3 levels it had followed last week. But due to unexplained circumstances (honestly I do not know why the Kwacha has appreciated so sharply, I predicted a slow rise) the dollar reached 5.4 levels this week.

In the last week of January the dollar began rising slowly on Monday and Tuesday then on Wednesday the dollar made the most remarkable appreciation from 5.37 to 5.421 (See Graph).

Again I cannot stress enough how this appreciation has eluded even my predictions. The only explanation can be an emotional trade after the events on Tuesday when Zambia was eliminated from the African Cup of Nations Football tournament. How to correlate this to the dollar rate is hard, but it’s the only significant event that happened on Tuesday with the ability to create such a sharp rise on Wednesday.

Going forward my speculations remain the same as they were last year. The dollar could reach upper limit levels of 5.5 to the Dollar. My assumption here is that anything close to K6 will motivate the Bank of Zambia to intervene. But given the sharp rise in the dollar in just one week, I wouldn’t bet against the dollar going higher to 5.6 and 5.7 levels.

Disclaimer: All conclusions are based on fundamental speculation.

 

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China Manufacturing hits 2 year high

  China’s manufacturing is expanding at the fastest rate in two years, according to a private survey of companies, bolstering prospects that economic growth will accelerate for a second straight quarter.
China’s manufacturing crept higher this month to the fastest pace in two years, a survey showed Thursday, in another sign the world’s second-biggest economy is coming out of a downturn.A preliminary version of HSBC’s monthly purchasing managers’ index rose for the fifth month in a row to 51.9 in January from 51.5 in December. Readings above 50 on the 100-point scale indicate an expansion.

 China’s economy is rebounding from its deepest slump since the 2008 global financial crisis but many analysts predict the recovery will be anemic and wonder whether it will be sustained.HSBC’s chief China economist, Qu Hongbin, said that gains in new business allowed manufacturers to step up production by adding jobs and making more purchases.“Despite the still tepid external demand, the domestic-driven restocking process is likely to add steam to China’s ongoing recovery in the coming months,” Qu said.HSBC’s index is based on responses from 85 to 90 percent of purchasing executives surveyed at 420 manufacturers. The full version is due by Feb. 1.While domestic demand is holding up, demand for shipments of goods like clothes, toys and electronics is more uncertain because of a weak U.S. recovery and austerity measures in Europe. Export-driven manufacturing employs millions of Chinese workers, though the country’s reliance on trade has lessened as domestic consumption has grown.The Chinese economy expanded 7.9 percent in the final quarter of last year, up from 7.4 percent in the previous quarter, according to data released earlier this month. For all of 2012, the economy expanded 7.8 percent, the slowest annual performance since the 1990s.Economists were watching the index closely for any signs of how China would perform in the near future.Many predict that the rebound will peak in the coming months before easing off to produce growth of about 8 percent for the year, well below double-digit rates of the past decade.Yao Wei, an economist at Societe Generale, noted that the survey’s sub-indexes showed production continued to grow but at a slower rate while new orders edged lower. Similar slowing in previous cycles often came three to four months before the peak

“Hence, the next few reports will be crucial for the assessment of how much stronger growth can get,” she wrote in a research note.

Gains in China’s industrial output and retail sales picked up pace in December, a statistics bureau report showed Jan. 18. Industry and construction accounted for about 45 percent of GDP last year, compared with 45 percent for services and 10 percent for agriculture, according to statistics agency data.

China’s industry ministry is forecasting a 10 percent rise in factory output this year, unchanged from 2012’s pace.
Alcoa Inc., the largest U.S. aluminum producer, said Jan. 8 that it sees global demand growth for the commodity recovering to 7 percent in 2013 as China’s economic rebound drives demand for cans, transport and office buildings.

 The government has paused from easing monetary policy since July after two interest-rate cuts and three reductions in banks’ reserve-requirement ratio. At the same time, authorities have accelerated investment-project approvals, increased infrastructure spending and cut taxes for small businesses to boost domestic demand and support growth.

Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong, said he expects no cuts in interest rates or the reserve ratio this year as growth recovers and inflation accelerates. The HSBC index “reinforces our view that GDP growth will pick up further” in the first quarter to 8.2 percent, Zhang said in a note today.

Economeka Capital

Well given the data there are many ways this news can be interpreted. But the logical conclusion is the beginning of this year could be good for commodities. We have already seen gold reaching levels it hasn’t been at in a while.

These better manufacturing numbers can be attributed to the impeccable intervention by the central bank mid to late last year. The two interest rate cuts and the three reductions in banks reserve ratio requirement helped stimulate infrastructure finance sentiment leading to the record 2 year manufacturing number we are seeing today. This coupled with the acceleration of investment project approvals and lower taxes has stimulated manufacturing growth numbers.

What this means for commodity producers round the world and in Africa especially is that there is sufficient reason for optimism going into 2013.The slow but evident recovery in the US housing market indicates signs of improvement, coupled with the Federal reserve’s commitment to its asset purchase program for the better part of this year.US Recovery is just around the corner.

What this means for a Zambian point of view is that mining firms could benefit from an increased demand of copper which could translate into a higher price per tonne. A first Quantum mineral which is listed on the Lusaka stock exchange could see realistic gains in share value (speculation).

 

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Bank Of Zambia places Caps on Annual Interest Rates of Non-Banking Financial Institutions

According to a press release from the Bank of Zambia.BOZ has placed Interest rate caps on Non-banking financial institutions and microfinance institutions.

BOZ Press Release

Further to the recent measures taken on commercial banks, the Bank of Zambia wishes to advise that the Bank has also decided to introduce a cap on the effective annual lending interest rates that non-bank financial institutions licensed by the Bank of Zambia can charge their customers. This measure has been necessitated on account of the exorbitant interest rates that some non-bank financial institutions have continued to charge their customers. The capping of interest rates therefore is aimed at making borrowing from non-bank financial institutions more affordable and equitable especially to the vulnerable micro-borrowers served by this sector.

As a consequence, the following measures have been taken:

1. The maximum effective annual lending interest rate for non-bank financial institutions designated as microfinance service providers by the Bank of Zambia shall not exceed 42%. Consequently, the Bank will designate non-bank financial institutions qualifying under this measure.

2. The maximum effective annual lending rate that will be charged by all other non-bank financial institutions will not exceed 30%.

The interest caps of 42% and 30% indicated above have been arrived at by multiplying the commercial bank maximum effective annual lending interest rate, which currently stands at 18.25%, by factors of 2.302 and 1.644, respectively.

The Bank of Zambia will periodically revise the factors applicable to the non-bank financial institutions interest caps, in response to changes in economic fundamentals and the commercial bank rate.

This measure is with immediate effect and the conditions will apply to new loans written. Existing loans will, however, be allowed to run their course on the current terms unless refinanced.

Economeka Capital View


Now some people would ask why is this even important.Well it basically means you can now borrow money for less.Some Banks actually have way lower interest rates than most microfinance institutions.The only tricky part is from who between the two is it easier to get a loan, the truth however is microfinance and other non-banking finance institutions are more lenient than most banks when giving out loans(given that they charge more interest).

Now Follow me, Evidence from numerous interest rate targeting central banks indicates that the policy rate should be aimed at influencing developments in the interbank rate, which is then expected to affect borrowing costs along the yield curve. The interbank market is therefore expected to play a crucial role in the implementation of the interest rate targeting framework.
The Bank of Zambia carried out a survey where
 The question posed to commercial banks was:
What factors do you take into consideration when determining the base lending rate for Kwacha/Foreign currency loans?

Overall, it was observed that the most common factors considered in the rate setting process were, as expected, the regulatory cash reserve requirements – namely, the statutory reserve ratio (8%), core liquid asset ratio (9%) and the BoZ supervisory fee (0.2% of deposits). Other factors which were considered significant in the determination of base lending rates included: Treasury bill and GRZ bond yield rates; operating costs; cost of funds, i.e. weighted average deposit rates; return on shareholder’s equity and the cost of non-performing loans. The qualitative factors highlighted included, credit risk premiums, the demand and supply for credit and the industry trend in base lending rates. Some of the other findings of the survey where suprising even for me.
The survey results indicated that only half of the banks surveyed considered inflation explicitly in their determination of base lending rates; although some banks indicated that inflation was taken into account when calculating real returns. It was also found that almost all the banks DO NOT CONSIDER the interbank rate, or the BoZ overnight facility rate in their calculation of base lending rates.
Now why am I going on about the survey,well it means that If BoZ uses the Interbank rate to try to influence Banks to drop their rates when Banks themselves do not consider the Interbank rate when setting rates, Connect the dots and you will see that it would be a waste of time by BoZ.

Long story short...What BoZ has done by placing caps on the interest rates for micro finance and non-banking financial institutions will effectively bring down the weighted average lending base rate.This will be good for the cost of doing business in Zambia.

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