BNY’s Geoff Yu sees progress in South Africa, linking it to structural improvements under the Government of National Unity and support from the early 2026 commodity rally. He says these factors helped the Rand and the country’s terms of trade.
He warns that this support could reverse if energy stress returns. He also notes that new reforms, such as fiscal rules, will take time to take effect and may depend on loose global financial conditions.
Yu adds that recent wage settlements remain high. He says markets may seek higher nominal rates to cover risks tied to raw inputs and labour supply.
He remains positive on emerging market fixed income overall. However, he says emerging market currency exposure, including ZAR, needs tighter risk management as inflation risks rise and if central banks respond too slowly.
The article was produced using an AI tool and reviewed by an editor. It was published by the FXStreet Insights Team.
For much of the past 18 months, we have held a positive view on South Africa, largely due to the structural progress made under the Government of National Unity. Looking back, the policy certainty that emerged throughout 2025 provided a stable foundation for investment. This political backdrop continues to support our broadly constructive stance on the country’s assets.
The commodity rally in the first two months of this year provided a significant lift, with key exports like platinum gaining over 12% and pushing the country’s trade balance into a temporary surplus. This offered strong support for the Rand, but we see this as fragile. A sudden shock to global energy markets could easily reverse these gains in the coming weeks.
Inflationary pressures are becoming a more immediate concern and are tempering our optimism on the currency. Last week’s data showed consumer price inflation accelerating to 5.9%, driven by recent public sector wage settlements that averaged above 7%. The market may now begin demanding higher interest rates to compensate for these growing risks.
Therefore, derivative traders should consider separating their view on South African assets from their currency exposure. We recommend using options to hedge against a weakening Rand, for instance, by purchasing USD/ZAR call options to cap potential downside on ZAR-denominated holdings. This strategy allows for continued participation in the country’s positive reform story while insulating portfolios from FX volatility.
This need for tighter risk management extends beyond South Africa to our broader emerging market currency exposure. While we remain positive on EM fixed income, the rising threat of inflation demands a more proactive hedging approach. Unhedged currency positions are becoming increasingly risky, especially if central banks are perceived as being behind the curve.
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