Thirty one year (31yr) low Sterling plummet and its implications for Zambia.

The Sterling hit a 31 year low on Tuesday 05 July as uncertainty masks Europe post BREXIT. US treasuries were forced to record lows at 1.35% for the 10yr paper as German bunds and Italian bonds yielded negative rates. Apparently the post BREXIT rally was halted with the FTSE 100 being the only index in green as all other indicators flashed red in Europe. This contagion has spread to other markets.

Sterling trajectory graph showing the GBP weakest.
Sterling trajectory graph showing the GBP weakest.

This is the uncertainty that caused a 2 year higher Silver price of above $21.5/t.oz and made Gold more precious to $1,352/ounce. Investors can only seek refuge in precious metals.

Investor confidence was undermined by the Bank of England’s warning on the economic risks of “Brexit” and its steps to ensure British banks keep lending, as well as by news of a decline in U.S. factory orders and reports of mixed manufacturing and service sector activity in Asia and Europe.

Bank of England governor Mark Carney said global uncertainty could persist for some time and Chinese Premier Li Keqiang said it could be hard for his country to sustain 6.7% growth in Q2:2016.

“The consequences of Brexit have put a summer UK interest rate cut squarely on the table, exacerbating negative sentiment towards UK-based assets,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

What does this mean for Zambia?
The effects are indirect. A volatile European markets transmits to the Rand market which benefits Zambia’s import position. The Rand as an emerging market currency is integrated with the global system. It’s actually a very good proxy for EM currencies. Provided the Zambian Kwacha remains resilient a widening Rand – Kwacha spread makes imports far cheaper. South Africa is Zambia’s biggest trading partner. A weak Rand is good for Zambian trade position. With hyper inflation experienced in Zambia we can expect an ease on inflationary pressure.

Kwacha-Rand widening spread graph from
Kwacha-Rand widening spread graph from

“The Southern Africa nation is well positioned for this global uncertainty, let alone lack of integration with the global financial system directly offers perfecting hedge against adversity,” ZBT Strategist said. However if China on the other hand can’t guarantee 6.7% growth then we should worry about demand for our copper. It may just threaten the rally currently observed, she said.

More articles on Sterling weakness and its effects.