The Zambian kwacha is in deep trouble as the country goes through an economic and weather-related crisis. The USD/ZMW pair has risen for five straight weeks and is now hovering at its all-time high. It was trading at 27.20, up by over 20% from its lowest swing this year.
The Zambian kwacha is in a freefallThe Zambian kwacha, like many other African currencies, has been in a strong downward trend against the US dollar, euro, and sterling for decades. In its case, it has crashed by over 800% from its lowest level in 2008.
That has had major implications to Zambian citizens as savers have seen their purchasing power deteriorate. In simpler terms, if you had saved 100,000 kwacha in 2008, you had an equivalent of $31,847. Today, assuming that the money did not make any interest, the amount is worth just $3,675.
The ongoing collapse of the kwacha will have an impact on the country’s inflation, which has been rising gradually recently. Data by the statistics agency shows that the headline Consumer Price Index (CPI) rose to 13.8% in April from 13.7% in March. Inflation has been rising after bottoming at 9.4% in 2022.
As a result, the Zambian Central Bank will likely continue its hiking cycle. In February, it hiked rates from 11% to 12.50% as inflation continued rising. It has hiked in all its meetings in 2022 and analysts see it raising rates on May 15th.
Zambian drought is continuingThe Zambian kwacha collapse is happening at a time when the country is going through a prolonged drought that is affecting millions of people. The government declared a national disaster in March and sought for donor funds.
Zambia’s drought is a major reversal from the past since the country has historically been highly productive. Experts blamed this drought to El Nino and climate change.
At the same time, debt restructuring talks have taken longer than expected and pushed the country into default. A team from IMF is visiting Zambia this week, a move that could see the agency release more money to help it deal with the drought. Such a deal will offer the kwacha some reprieve.
The other likely catalyst for the Zambian kwacha is the ongoing surge of copper prices. Data shows that the price of copper has jumped by almost 17% this year and analysts expect the trend to continue as demand rises.
Copper is an important resource for Zambia as it is its biggest export. While output has been falling, the government expects to boost annual production to 3 million tons by 2030. However, in the near term, the impact of copper on the kwacha will be limited.
The other potential catalyst for the Zambian kwacha is that the USD/ZMW has formed a double-top pattern whose neckline is at 22.5. In most cases, this is one of the most bearish signs in the market, meaning that the kwacha could stage a comeback soon. In the long term, however, the outlook for the currency is bleak.
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