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EM-Rand leads losses as Covid-19 fears grip EM

The rand fell 0.7% after three straight sessions of gains
Image: Bloomberg

South Africa’s rand fell on Monday to lead losses on an index of emerging market currencies, as Covid-19 curbs were increased after a third wave of the pandemic gripped the country, adding to a growing list of nations introducing more restrictions.

The rand fell 0.7% after three straight sessions of gains, as curbs were tightened for two weeks with the country battling the fast-spreading Delta variant amid a slow rollout of vaccines. The currency is down more than 3% so far this month – among the worst EM performers in June.

South Africa is the worst hit on the African continent in terms of recorded cases and deaths. It reported almost 18 000 new cases on Saturday, approaching the peak of daily infections seen in a second wave in January.

This followed a decline in most Asian currencies. Infections in the region sharply rose, with Malaysia set to extend a lockdown and Thailand announcing new restrictions in Bangkok and other provinces.

“There are theoretically well-founded arguments to be pessimistic regarding the strength of the lockdown boom,” said Ulrich Leuchtmann, head of FX and commodity research at Commerzbank.

“So far, we had assumed that the hope of longer term stronger post-lockdown returns will continue over the summer and will only ease in the autumn.”

A slew of PMIs this week, from both the developed and developing economies, will be watched to gauge the trajectory of progress from a pandemic-induced slump. On Monday, a survey showed South Africa’s consumer confidence slipped further in the second quarter.

China’s factory activity is seen expanding at a slower pace, a Reuters poll showed. Fitch on Monday affirmed China’s sovereign rating at A+ stable, while JPM has moved down its risk reward scorecard for frontier markets to neutral from positive.

Currencies elsewhere fared better against a weaker dollar. Turkey’s lira firmed 0.2% after two sessions of falls, while crude exporter Russia’s rouble extended gains to a fifth straight session as oil prices stayed closer to 2-1/2 year highs.

MSCI’s index of EM currencies fell 0.1%, looking set to end the month by the same measure, while the equities counterpart was on course to mark small gains in June.

EM stocks reversed their outperformance of the benchmark S&P 500 by late-March, with the lag widening as the first-half draws to a close amid renewed coronavirus concerns, inflation worries and consequent doubts about US monetary policy stance.

JPMorgan EMBI debt spreads were also on the rise again – nudging up 3 basis points to 331 after falling over the last week.

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