BNY’s Geoff Yu argues that weaker precious metals are undermining the terms of trade for South Africa and Peru, limiting upside for South African Rand (ZAR) and Peruvian Sol (PEN) even in a supportive carry backdrop. While he sees ongoing pressure from falling metals prices, the report highlights institutional reforms and policy shifts that could prevent outright aggressive underperformance in these currencies.

Metals-linked FX faces headwinds

"The ongoing weakness in precious metals performance is therefore significantly affecting currencies with the greatest relative terms-of-trade exposure. Industrial metals or other “hard assets” are facing similar pressure from high nominal and real yields. The marginal cost to export receipts will undermine performance in what should be an improving environment for the carry trade."

"As for direct exposure, we believe ZAR and PEN have the most to lose. Platinum and platinum group metals (PGMs) dominate South African exports, while Peru is the world’s third-largest silver producer, its exports disproportionately large relative to China and Mexico, the top two producers."

"Falling precious metals prices will continue to impact ZAR and PEN performance, but we don’t see a shift toward outright underheld or aggressive underperformance. There are institutional factors that could prove beneficial, such as South Africa’s inflation mandate and central bank resilience."

"Peru is also on the cusp of policy changes that are seen as more business-friendly and U.S.-aligned, potentially helping asset performance emulate the recent gains in Colombia."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)