BORIS SCHLOSSBERG<br /><strong>DIRECTOR OF CURRENCY RESEARCH, GFT</strong><br /><br />LAST week I wrote that the recovery trade was starting to hit a ceiling as risk assets stalled at key resistance levels of 10,000 on the Dow, 1,100 on the S&P 500 and 1.50 for euro-dollar. Despite relatively positive economic data from across the G20 this week, the risk trade has been unable to make much progress so far.<br /><br />What’s causing this pause in the rally? I believe we are in the midst of a massive shift of focus as investors stop asking if the recovery has arrived (clearly for most G10 countries it has) and start asking whether this recovery is sustainable once the stimulus measures undertaken by fiscal authorities begin to wear off.<br /><br />Last week, the US GDP data surprised to the upside, coming in at 3.4 per cent versus the 3.2 per cent forecast. But after the initial enthusiasm wore off, investors went right back to selling risk assets when they realised that nearly 90 per cent of US GDP growth in the third quarter resulted from government stimulus programs, such as cash for clunkers.<br /><br />In order for the risk trade to continue unimpeded into 2010, the global economic recovery must sustain itself through organic demand, rather than further fiscal spending. With most G10 government budgets already stretched to the limit, additional deficit spending is unlikely to occur. Furthermore, the need to raise revenue could spur a series of tax hikes in Europe and US, which could depress demand even more.<br /><br />Therefore, the continuation of the recovery trade depends largely on improvement in labour market conditions. Without jobs, growth is not going to be sustained in 2010 and high beta currencies could face another sharp bout of profit-taking if investors once again turn risk averse. That’s why the near-term direction of the currency market will be governed by US employment data. <br /><br />This week, the market will turn all of its focus on the employment components of US ISM manufacturing and services reports, which tend to be relatively accurate predictors of the critical non farm payroll report due on Friday. Presently market consensus calls for another loss of 175,000 jobs, but if the US economy continues to suffer contractions of 200,00 or more, risk assets will have trouble making new yearly highs. <br /><br />Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read their commentary at www.GFTUK.com/commentary or e-mail them at BorisandKathy@gftuk.com.