BASELINE VIEW - PRECIOUS METALS: Gold will remain focused on the movements in the dollar and US treasuries for short term trading bias. Investors with a longer-term outlook

will favour accumulating on any dips as a hedge against both the geopolitical and macro-economic risks.

The noble group metals have the slowdown in the global economy and supply constraints playing tug of war with price action. Up until now, concerns surrounding global growth have

overshadowed the supply issue.

BASELINE VIEW - INDUSTRIAL METALS: Low inventory levels, the war in the Ukraine, and the sanctions against Russia are underpinning base metal prices, while economic growth

concerns and tighter monetary policy from the likes of the Fed are providing the cap. Looking forward, the growth concerns may begin to ease as China starts opening Shanghai,

however, we are still many months away from “normal economic conditions”. We do not expect volatility in the base metal basket to temper anytime soon.

The ZAR has performed impressively this year, and that performance has been characterised by strong ZAR sentiment, attractive carry, fundamental resilience, and a fundamentally undervalued ZAR. Three months of appreciation later, and the ZAR is now overvalued, but is that enough to imply that a reversal is automatically guaranteed?

ZAR resilience could extend a little longer

Heading into the March 24 SARB MPC meeting, we expect the SARB to deliver a third consecutive 25bps rate hike as policymakers look to rein in inflation expectations, which have surged on the back of soaring commodity prices, particularly food and oil.

Welcome to the first webinar for 2022.

BASELINE VIEW PRECIOUS METALS: Gold remains underpinned by the geopolitical tensions brewing in Eastern Europe coupled with the longer-term fears surrounding a sustained period of high inflation globally. The topside has been capped by thoughts of the US Federal Reserve tightening monetary policy, which has boosted US Treasury Yields raising the opportunity cost of holding gold as it generates no yield itself. Longer term investors with a buy and hold strategy will find any levels below $1750.oo/oz attractive entry points to add to gold holdings, while those trading gold from a short term perspective, will find levels approaching $1875.00/oz somewhat stretched.

Palladium continues to outperform Platinum at the start of 2022. The risk for both metals is the threat of an all-out confrontation in Eastern Europe, which will hit global economic sentiment. Investors in these metals are also keeping a close eye on monetary tightening, which can curtail economic dynamism. Consolidation is favoured for now.

BASELINE VIEW INDUSTRIAL METALS: Currently, low inventory levels, Chinese demand, the threat of conflict in Eastern Europe and the potential sanctions that the US is looking to implement against Russia, coupled with tighter monetary policy from the US Federal Reserve, are the major factors driving the Industrial Metals prices. Several country specific idiosyncratic factors, such as copper supply concerns from Peru and mine nationalisation discussions in Chile are impacting prices. While Indonesia’s move to keep nickel at home will keep supply constrained and nickel prices at lofty levels. We see the current levels of base metals as sustainable and do not envisage a wholesale reversal.

Bottom Line: In line with expectations, the SARB hiked for the second consecutive meeting, and all indications are that this is the start of a trend that will persist throughout the year. Only if the data begins to soften will the SARB reassess the economic outlook in favour of pausing; however, there is much to take into consideration. Internationally, central banks around the world are hiking, and the SARB will not want to be out of step with them lest it leaves SA exposed to a ZAR blow-off. Domestically, however, the economy is weak and the credit cycle soft. It is not the kind of environment that would result in runaway inflation. Should inflation domestically prove transitory in line with SARB expectations, the more hawkish estimations of interest rates could very well moderate.

BASELINE VIEW: SARB guidance suggests that each meeting hold rate hike risk with 25bp of hikes for the foreseeable future, which would take up another 200bp. However, one should not forget that the QPM has been wrong in the past as it formally hinges on expectations for various inputs that are ultimately unpredictable. Weak growth will challenge the outlook, while ZAR weakness would raise the probability of rate hikes, which is why the current ZAR vulnerability may embolden the SARB to do more.

Local and global risks portend to a potentially volatile first quarter:

Bottom Line:

• From an international standpoint, risks facing the ZAR remain elevated even if these risks look a bit different to what they did in recent quarters. The world is moving away from the pandemic, and market focus has shifted towards what the global economy will look like going forward. This means monetary policy normalisation and combatting the imbalances that have been created as a result of the global lockdowns and the massive stimulus measures deployed. However, an initial sigh of relief may drive risk appetite as we exit the pandemic, allowing for some potential ZAR appreciation before the negative effects of global monetary policy normalisation are felt.

• Locally, political and fiscal risks remain pertinent. There has been a lot of talk of implementing more sustainable policies and rooting out corruption, but so far, none of that has materialised in any significant manner. This will keep a risk discount embedded into the ZAR, with the potential for the currency to unwind some of this if we see progress made on these fronts. If we don't, SA's descent into the fiscal danger zone and its corruption-embedded government will continue to detract from the appeal of the currency.

BASELINE VIEW: Risks to the ZAR have shifted in recent months, but this is not to say that the ZAR will find it easy going in the quarter ahead. Investors have to price in a range of factors, from the resumption of infections of the Omicron variant to the strength of the US economy and the implications for US monetary policy. It makes picking direction difficult, especially as there are several risks that could drive some volatility. Beyond this volatility, a recovering local economy and easing of commodity prices will leave the ZAR open to depreciation towards the latter half of the year. Any bouts of appreciation in the coming weeks, therefore, should be utilised to purchase USDs or forward cover.