Key points

• In the past week, there have been many geopolitical developments that have raised some eyebrows. Most of them can potentially escalate into something catastrophic and negatively impact risk appetite. Given the ZAR’s recent appreciation and the stretched nature of the move, the ZAR faces some risk asymmetry. The greater the geopolitical tensions, the more reason to be sceptical of the ZAR’s ability to remain resilient.

• Russia’s war in Ukraine holds the potential to spill over into a broader NATO conflict that could, in the worst-case scenario, turn nuclear. Similarly, the war betweenHamas and Israel is a proxy war between Israel and Iran that also threatens to spill over into a broader regional conflict. Just this week, tensions between Israel and Iran ramped up as Israel attacked nuclear installations and key military officials.

• Concurrently, the US is imposing its will that Iran does not gain nuclear capabilities and that too is a development worth watching. In response to Israel’s attack on Iran, not only has it launched drones against Israel and Israeli installations, but it warned that it would attack the US as well. This cocktail of risks ismore than enough of a reason to reduce global risk appetite levels and cause dislocations in some markets.

BASELINE VIEW:

Towards the back end of this week, the ZAR showed some signs of faltering. Its appreciative trend has extended to alevel that is difficult to sustain. The current rise in geopolitical tensions is enough of a catalyst to trigger a USD-ZAR correction to potentially as high as 18.5000. Such levels should not be seen as a reversal of fortunes for theZAR; instead. The move should be considered a healthy correction.