“Part of what’s happening in South Africa is the delayed effect from the social and economic devastation triggered by Covid, which we are likely to see more of in the future,” said Francesc Balcells, the London-based chief investment officer of emerging-market debt at FIM Partners. “You want to stay away from crowded trades that have embedded a lot of political risk.”

While the rand remains this year’s top emerging-market performer, it has fallen as the violence that erupted following former President Jacob Zuma’s jailing presented a deepening crisis for his successor, Cyril Ramaphosa. Last week, the currency touched its weakest against the dollar since March — though it clawed back some losses on Friday — as the potential blow to the economy from the turmoil and a spike in Covid-19 cases reined in expectations for tighter monetary policy.

South Africa will likely keep its interest rate unchanged on Thursday, economists predict. With a more hawkish policy stance in Russia, UBS AG said it prefers the ruble to the rand, with a potential weakening in metal prices adding to pressure on the South African currency, according to Manik Narain, the head of emerging-market cross-asset strategy at UBS in London. Russia is expected to raise its benchmark rate by 75 basis points on Friday.

Kota Hirayama, an emerging-market economist at SMBC Nikko Securities Inc. in Tokyo, suggested selling the rand and buying Turkey’s lira after that country’s central bank resisted President Recep Tayyip Erdogan’s calls for lower rates and vowed to maintain its monetary stance until a major drop in price growth.

“As for the rand, the riots have caused considerable economic damage, may quell market expectations for a rate hike while raising concerns that funds may flow out of the country,” Hirayama said. “Being long in the lira, which has higher interest rates, and shorting the rand is a rational trade as investors can earn yield differentials.”

Others see the rand’s slump as a buying opportunity. Commerzbank AG now favors it against the lira, betting the Turkish currency’s gains against the rand since early June are likely to be reversed by October, according to Tatha Ghose, a London-based senior economist at the firm.

Credit Agricole CIB said it closed a strategy to buy the Chilean peso against the rand, booking a 2.3% profit after South Africa’s turmoil sent its currency tumbling. But the two countries’ fortunes may soon reverse as presidential primaries on Sunday in the Latin American nation raises the heat there.

“We are getting concerned about rising political risks in Chile,” strategists Sebastien Barbe and Olga Yangol wrote in a note. “As investors’ attention increasingly turns to the political developments, we prefer to take the chips off the table tactically.”

The rand and Chilean peso were among the biggest developing-nation currency decliners against the dollar last week, along with Hungary’s forint and Poland’s zloty. Brazil’s real, Peru’s sol and Turkey’s lira advanced.

Election Risks

The sol has suffered the second-biggest loss in the developing world over the past three months, with leftist outsider Pedro Castillo winning the June 6 runoff. Investors are concerned that another less market-friendly candidate may emerge in Latin America as Brazilian President Jair Bolsonaro’s popularity falls to the lowest since assuming office ahead of general elections next year.

“There is a strong correlation between countries where you are seeing the potential for political instability — i.e. South Africa and much of South America — and a poor track record at combating Covid which is resulting in lagging growth vis-a-vis countries that were much successful in dealing with the virus,” said Todd Schubert, head of fixed-income research at Bank of Singapore Ltd.

In South Africa, just 7% of the population has gotten at least one vaccination jab, compared with rates of around 50% or above for most European nations. It’s about 20% in Peru, while 44% of Brazilians and 29% of Colombians have received at least one jab, according to Bloomberg’s vaccine tracker.

Schubert is “less enthusiastic” about Peru, Colombia and Brazil because of the “potentially enhanced political volatility,” he said.

Colombia’s credit rating was cut to junk by S&P Global Ratings and Fitch Ratings as the nation’s debt outlook worsened after the government withdrew a bill to raise taxes which triggered mass civil unrest.

“Governments often indulge themselves in fiscal extravagance prior to elections, a choice not so readily available given the Covid-related fiscal largess of many countries,” said Marshall Stocker, a money manager at Eaton Vance Corp. in Boston. “That could make incumbent governments more vulnerable at the ballot box and in the streets.”

Rate Decisions

• On Thursday, Bank Indonesia is forecast to keep its benchmark rate at a record-low 3.5%, according to a Bloomberg survey
  • The central bank will only start to tighten monetary policy next year if the recovery remains on track, Governor Perry Warjiyo said this month
  • Southeast Asia’s biggest economy has become a new virus epicenter. The government imposed its tightest movement curbs this month to halt the spread of the delta variant. Concern over the current outbreak has contributed to the rupiah’s 3.1% loss this year.
  • “The latest virus resurgence will hurt growth and delay an economic recovery,” Krystal Tan, a Singapore-based economist at Australia & New Zealand Banking Group Ltd., wrote in a note. “While BI will want to keep monetary policy accommodative, its focus will be on macroprudential measures and improving policy transmission.”
• The same day, the South African Reserve Bank will probably keep rates on hold, though it’s likely to deliver a more hawkish statement, according to Bloomberg Economics
• On Friday, the Bank of Russia is expected to step up the pace of tightening with a possible rate hike of 75 basis points or more as inflation runs well above target and shows no signs of easing

Key Data

• China will announce one- and five-year loan prime rates on Tuesday after authorities cut the reserve requirement ratio for banks
  • They’ve been unchanged since the last cut in April 2020
  • The one-year gauge is the reference rate for bank loans to companies, while the five-year is for mortgages
• Taiwan will report June export orders on Tuesday
  • They are likely to have increased by between 28.1% and 31.7%, government officials said last month. The data serve as a leading indicator for future demand for goods from the island’s companies.
  • Taiwan’s dollar is the best-performing currency in emerging Asia this year
• Thailand will publish customs exports data for June on Wednesday
  • Exports jumped 41.6% in May, the most since 2010, data showed last month
• Malaysia will announce CPI data on Friday, with the result expected to remain suppressed due to movement restrictions put in place
• Brazil is set to release mid-July IPCA inflation data on Friday
  • The real has rallied the second-most in emerging markets this year
• A reading of Argentina’s May economic activity index on Wednesday could take a hit from an uptick in mobility restrictions, data from Bloomberg Economics show
• In Mexico, traders will watch bi-weekly inflation numbers on Thursday and retail sales figures for the month of May on Friday for clues on the path ahead for recovery and policy
• Colombia’s economic activity results on Monday are expected to show an annual increase in May given the low base of comparison as the virus locked down cities in 2020, Bloomberg Economics forecasts