CHINA was the biggest market surprise in 2009 as the country’s GDP growth almost single handedly rescued the world from the worst economic recession since the war. The continuation of the recovery trade will be dependent on whether G20 economies can take the baton from China as its economic growth slows to a more natural pace.

The latest Chinese manufacturing survey data released on Monday showed a slight decrease in activity, coming in at 55.8, versus the forecast of 56.6. This was the second best reading in 21 months, but nevertheless suggested that growth is beginning to decelerate. Employment moderated, rising at the slowest pace in six months while price pressures continued to escalate.

The latest market assessment of the Chinese economy indicates that rising price pressures are likely to trigger a tightening in monetary policy that will temper growth as the year progresses. The key question going forward is whether the demand from the rest of the G20 can offset the natural slowdown in Chinese output. The risk trade in
FX will be affected by such an outcome. So far the markets appear uncertain as to whether such rebalancing will take place in 2010.

The US remains the key to the global recovery story. US businesses will need to see an incremental increase in end demand, which can only come from the expansion of the labour force. For this reason, this Friday’s non-farm payrolls report looms large for the FX market. If the US economy can demonstrate positive job growth for the first time in more than two years, the dollar could rally strongly against the yen, while high-yielders such as the Aussie could finally find some support as risk appetite revives.

Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary on currencies at or e-mail them at