The South African rand remains the worst performing EM currency month-to-date as Q1’s GDP release roiled investor nerves.
However, with much of the sell-off in the rand attributed to souring foreign investor sentiment given last quarters deterioration in economic conditions, the rand may start to show signs of a sharp reversal if the economic data supports an improvement in sentiment.
Granular data releases are likely to have increased market impact for this reason as investor’s try to gauge the economic rebound in Q2.
Thus far, current economic activity indicators point towards a strong reaction in growth, especially in April, as the effects of load shedding begin to fade.
Chart 1: Current activity monitors point towards a strong rebound in South African growth following a dismal Q1
This has been reinforced today with the strong beat in manufacturing production data for April, with the 4.6% non-seasonally adjusted rise the largest one-month increase since June 2016.
Much of the increase can be attributed to the rise in production of basic iron and steel, metal products and machinery (+9.4%) and motor vehicles, parts and transport equipment (+18.6%).
The median consensus remains overly bearish on the currency, which has a large reserve of upside factors it can tap into.
With the Federal Reserve turning increasingly dovish by the day, the door remains wide open for market reforms from the reinstated President, which will likely have a substantial impact on the rand once publicised.
In the short-term, pessimism on South African assets may have peaked as idiosyncratic risks begin to retreat from the markets limelight and economic data shows signs of recovering.
Chart 2: The South African rand starts to claw back heavy losses seen at the beginning of the month as idiosyncratic risks retreat from the limelight
Regardless, the risks are still apparent and further quarrelling inside the ANC party, load shedding by Eskom, or bleak commentary from Moody’s could reset the rand back into its path of depreciation.