During early Friday trading on the 13th of June, the South African rand fell 1.6% to 18.04 per USD, as global risk aversion rose amid Israeli military action concerning Iran. As investors shifted their focus to safe-haven assets, the rand’s well-documented rally—based on the resolution of a budget dispute and elevated commodity prices—came to a screeching end.
How did bond yields react?
Government bonds sold off sharply too. The 2035 benchmark bond yield rose 16.5 basis points to 10.25% indicating higher borrowing costs. This sharp sell-off illustrates the extent to which shocks in geopolitics can affect emerging markets’ financial systems.
What’s the broader context?
In the last few months, South Africa has had the tailwind of supportive domestic reforms, including a decrease in inflation target and high precious metal prices, which solidified investor confidence. The situation in the Middle East, an important oil producing region, has created renewed volatility in the context of U.S. trade policy under President Trump.
Keep Reading :
Iran Announces New Shipping Line to West Africa Over Economic Push
What are the upcoming economic triggers?
While there are no important local economic data releases today, major economic data releases are expected soon, next week in fact – consumer inflation and retail sales. Obviously these will allow us to better assess domestic economic health and may show how forcefully the SARB will choose to respond to external shocks.
This tightening is a reminder that even emerging market currency and bonds are subject to global geopolitical events. Higher oil and geopolitical risk premiums from Israel’s strikes pressurised South African assets, even though local fundamentals remained positive. The next inflation and retail numbers will be important, in that strong numbers might ease the pain, whilst weak numbers might exacerbate concern in markets.
