Soft Precious Metals Weigh on ZAR and PEN Carry Trades

Key Moments

BNY’s Geoff Yu notes that weakness in precious metals is eroding terms of trade for South Africa and Peru, limiting upside for ZAR and PEN.
High nominal and real yields are pressuring precious and industrial metals, creating headwinds for metals-linked currencies in what would otherwise be a favorable carry environment.
Institutional and policy factors in South Africa and Peru are seen as supporting ZAR and PEN, helping to avoid “outright underheld or aggressive underperformance.”

Metals Slump Constrains Currency Upside

BNY’s Geoff Yu argues that the recent downturn in precious metals prices is weakening the terms of trade for South Africa and Peru. In his view, this deterioration is capping the appreciation potential of the South African Rand (ZAR) and Peruvian Sol (PEN), even as broader market conditions remain broadly constructive for carry trades.

The analysis stresses that, despite a supportive backdrop for yield-seeking strategies, the drag from lower metals export revenues is offsetting some of the benefits for these currencies.

Pressure on Metals-Linked FX

“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.”

Yu highlights that, where currencies are closely tied to metals exports, the deterioration in prices is feeding directly into foreign exchange performance. This reduces the positive impact that investors might otherwise expect from elevated yields and carry opportunities.

ZAR and PEN Identified as Most Exposed

“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.”

According to the report, the concentration of South Africa’s export profile in platinum and PGMs, alongside Peru’s strong positioning in silver, makes ZAR and PEN particularly vulnerable to continued weakness in precious metals markets.

Country	Currency	Key Precious Metal Exposure
South Africa	ZAR	Platinum and platinum group metals (PGMs)
Peru	PEN	Silver

Institutional and Policy Support as a Counterbalance

“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.”

The report points out that, while metals-related pressures remain in place, structural features in South Africa – including its inflation-targeting framework and the perceived strength of its central bank – may help cushion the negative impact on the Rand.

Potential Tailwinds From Policy Shifts in Peru

“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.”

Yu suggests that prospective policy adjustments in Peru, viewed as increasingly business-oriented and more closely aligned with the U.S., could bolster investor sentiment and support Peruvian assets, including the Sol, despite the drag from weaker precious metals.