DOUBLE dip or muddle through? That’s been the central question facing the currency markets. As economic data started to deteriorate across the world amidst growing investor unease with fiscal policies in US and Europe, the bears have been eager to forecast another global contraction. Yet, although the latest data has been anaemic, it nevertheless remains in positive growth territory, suggesting that the global economy remains in expansionary mode. That fact goes a long way towards explaining why risk currencies such as the Australian dollar, the Canadian dollar and even the euro have been generally well bid, despite the recent turmoil in global capital markets.

This relative complacency could be sorely tested this Friday when the US non-farm payroll (NFP) report comes out at 1.30pm. The expectations in the market are for a relatively modest 90,000 print versus 117,000 the month prior, but that would still be in line with the muddle through scenario and should be generally supportive for risk currencies. However, some analysts are predicting a much more dour result. The sickening decline in the latest Philly Fed reading, which plunged to -30.7 from 4.0 projected suggests that the NFP could print negative this month, which would send investor sentiment plummeting and will likely trigger massive liquidations in the risk trade, as markets begin to price in the second coming of global recession.

Although the Philadelphia Fed survey is only one small data point across the US economic landscape, it has a very strong correlation with the broader employment figures. Unfortunately, the best forecaster of the NFP – the employment subcomponent of the ISM services report – will not be released until after the NFP results, and will therefore be useless in helping traders to handicap the number.

The currency markets will likely mark time until Friday’s key economic release, but could become very volatile in the wake of a major surprise either way. The euro-dollar, which has been glued to the $1.44-$1.45 range all week could break towards $1.50 level, or head to $1.40 depending on how data prints.