Amid these developments, market volatility in equities, foreign exchange, and bond markets has decreased since May 2025. The rand is currently trading within a narrow range of R17.70/$ to R17.95/$, while Forward Rate Agreement (FRA) rates remain biased towards a rate cut in July, with an 80% probability compared to ICIB’s 50%. However, the yield on the R2035 bond has increased by 12 bps as of the time of writing, primarily due to the recent switch auction on Thursday.
Our assessment of the underlying drivers focuses on the following dynamics:
- Inflation in non-USD economies is expected to remain contained, barring the risk of retaliatory tariffs. This is influenced by China exporting deflation and the competitive landscape for securing alternative markets for export goods, along with the impact of stronger currencies. Supply chains have not yet shown disruptions. The Economist states: “modern supply chains are resilient because they are professionally run. Specialised logistics firms have global reach, with cutting-edge warehousing and transport capabilities. Better communications enable rerouting when required. In America there are 95% more supply-chain managers than two decades ago”. (The Economist, “Disaster-proof capitalism”, 15 July 2025).
- The oil price remains relatively contained, reflecting America's status as a net exporter of energy compared to the 1970s. In 2023, OPEC was producing fewer than 33 million barrels of oil per day, which is only 12% more than production levels in 1973 (The Economist, 17 July 2025). This dynamic was evident during the 12-day conflict between Israel and Iran in June, where the oil price increased by $15 per barrel, reaching a peak of $80 per barrel, before subsequently retreating to $68 per barrel.
- Central banks outside the USD continue to adopt an easing bias, primarily driven by concerns over weaker growth linked to softer global trade rather than inflationary pressures. Fed easing is historically supportive of EM interest rates.
- The risk of a US recession appears to be lower, with estimates at 33%. Employment data indicates a gradual moderation alongside a consumer base that remains willing to spend. The US economy continues to demonstrate relative resilience, albeit with signs of moderation. The US Q2 25 GDP is published on 30 June and nowcast models project a rebound to 2.4% QoQ from a contraction of 0.5% QoQ in Q1 25, distorted by pre-emptive imports. US inflation is beginning to reflect the impact of higher tariffs, particularly in core inflation excluding automobiles, although producer price inflation has surprised on the downside, moderating to 2.3% (from 2.7%) and below the market expectation of 2.5%. Expectations for US rate cuts remain firmly in place, contrasting with 2022 when volatility arose from a divergence between market-implied rates and the Fed’s dot plot. Currently, the implied Fed funds rate expectation of a 45 bps cut by year-end aligns closely with the Fed’s dot plot projection of 50 bps.
Risks to the low volatility backdrop include:
- A sharp acceleration in US inflation.
- The TACO trade is overdone and President Trump does not backtrack in the end.
- Trump dismissing Powell, and the politicisation of Fed decisions.
- A trade war with tariff retaliation (threats from Canada, Brazil, EU and Japan) and disruptions in supply chains.
- US recession risk returns in the context of high equity valuations.
Fig 1 Generic UST2yr vols are low
Source: Bloomberg, ICIB
Fig 2 VIX and MOVE indices
Source: Bloomberg, ICIB
Fig 3 US 10yr term premium (Adrian Crump & Moench)
Source: Bloomberg
Fig 4 $/R realised and implied vols
Source: Bloomberg, ICIB