LONDON: South Africa's rand extended losses on Monday, falling as much as 1 percent to the dollar at one point amid an ongoing political crisis, whilst emerging equities inched to fresh three-month highs.
The rand has come under pressure following allegations of political interference by a family of businessmen, but South Africa's ruling party said on Sunday that it had full confidence in President Jacob Zuma.
South African markets were closed for a holiday but despite its weakness the rand stood some 5 percent above three-week lows hit last week after the weekend African National Congress meeting expressed support for finance minister Pravin Gordhan.
But investors fear further political uncertainty could hasten a credit ratings downgrade, potentially into "junk" territory, sharply raising South Africa's borrowing costs.
Peter Kinsella, head of EM research at Commerzbank, said the real interest rate premium in South Africa was one of the smallest in emerging markets, whilst tight liquidity was exacerbating market volatility.
"What you have is a situation where interest rates are low, the currency is weak, and there is heightened volatility so the carry on offer does not compensate for the drawdown risk and the political situation does not help at all," he said.
MSCI's emerging equity index was marginally higher after rallying over 3 percent last week. Kinsella said external financial conditions looked less challenging and current account deficits in many emerging markets had improved.
"But you still have pretty slow growth so the question is whether valuations are at attractive levels," he said.
Russian stocks were down over 1 percent, following crude oil prices lower, whilst the rouble was marginally stronger at around 68.4 per dollar. The central bank left rates unchanged at 11 percent on Friday, but delivered a more hawkish statement than expected.
Over the weekend, Russia's economy minister said the rouble was likely to be stronger than previously expected but would remain weaker than 60 roubles per dollar.
In Asia earlier, Chinese stocks rose over 2 percent, supported by the resumption of state margin lending after an 18-month suspension.
Some central European markets also managed to sustain last week's rally, with Budapest shares up 0.3 percent.
The forint weakened slightly against the euro after Standard & Poor's disappointed market expectations by not lifting the outlook on Hungary's credit rating to positive on Friday.
S&P also left Hungary's debt in "junk" territory, citing less predictable policy-making and increasing opaqueness around institutions such as the central bank.
The National Bank of Hungary is expected to keep rates steady at 1.35 percent when it meets on Tuesday.
The Turkish lira slipped off 3-1/2-month highs after an aide to President Tayyip Erdogan said interest rates should "definitely" be lowered, three days before a central bank meeting. Erdogan has repeatedly railed against high interest rates.
Credit Suisse analysts said rising security concerns were probably impacting economic activity after another suicide bombing in Istanbul at the weekend.
"This, in turn, increases the likelihood that the central bank will ease monetary policy, perhaps as early as this Thursday," they told clients.
Kazakhstan's tenge rose 0.2 percent to the dollar after President Nursultan Nazarbayev's Nur Otan party won 82 percent of the vote in a parliamentary election criticised by Western observers as falling short of democratic standards .
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