Low liquidity to weaken kwacha – NKC

Low liquidity to weaken kwacha – NKC.

THE kwacha is expected to come under pressure from major convertible currencies during the festive season on account of thin liquidity on the domestic market, says NKC African Economics.

And local market experts say the slowdown of market activity over the festive period will trigger volatile swings of the kwacha.

The South Africa based NKC stated that the kwacha, which has largely remained trading within the K9.60 – K9.95 limit per dollar, was expected to come under depreciatory pressure on account of persistently thin liquidity on the domestic market.

Tightened monetary policy, with the BoZ’s MPR kept at 15.5 per cent and Statutory Reserve Ratio at 18 per cent, has kept market liquidity levels relatively low in the final quarter of 2016, putting pressure on the banking and financial services industry, which has seen some businesses folding.

“General thin liquidity leaves the kwacha vulnerable to large swings going into the festive season, with December hosting a number of potential risky events. We see the US resuming interest rate normalisation at the December convention, at which time we expect a 25 bps [basis points] increase,” NKC’s senior financial economist Irmgard Erasmus stated in response to a press query.

“While this will not deliver a market surprise, it may add to some underlying depreciatory pressure on the kwacha, especially considering the thin domestic market.”

She stated that other factors that would apply pressure on the local currency included the volatile copper prices on the international market.

“Another factor to consider is potential large swings in the copper price, which has been volatile in recent sessions as markets recalibrate views in the wake of the surprise US election outcome, OPEC deal announcement, government stimulus package in China, and having come from relative undervalued levels following a long period of underperformance through this year,” Erasmus added.

“The copper price is seen as averaging US$5,078/t in 2017 and US $5,492/t in 2018. On the other hand, a slowdown in inflation and conservative monetary policy will limit underlying kwacha pressure.”

And FNB Zambia stated that the slowdown of market activity over the festive period would cause the kwacha to swing.

“We expect activity to slow down in December and the first half of January. The thin market will sometimes cause the currency to swing. Quite likely that K10.00 will at some point before the end the year be tested,” stated FNB in a daily treasury newsletter.
Cavmont Bank, however, stated in a market report released on Friday that the kwacha was likely to trade strong in the short-term should dollar demand continue to weaken, especially during the festive season.