FX 360

ONE of the more astounding aspects about the recent price action in the currency market is the absolute lack of direction in euro-dollar. Over the past week the pair has traded in a miniscule 150 point range – its narrowest swing in more than four years. With the Greek saga now behind us and credit concerns relieved for the time being, both bulls and bears appear exhausted and the market finds itself in a state of near perfect equilibrium, as currency traders look for the “next, next thing”.

As currency traders begin to lose their single-minded focus on credit and financing in the Eurozone, the markets are turning back to fundamentals as the key driver of forex trading. To that end, the data this week could prove instrumental in determining whether the risk trade remains a good bet or quickly turns sour.

The most recent global economic data has been mixed, contributing to the sense of indecision that is already prevalent in the currency market. Nothing illustrated that point better than the latest Chinese manufacturing purchasing managers’ index (PMI) data that came out over the weekend. The official readings showed that the sector expanded for the fourth month in a row, suggesting that China’s economic soft landing is working. However, the private HSBC report showed that output remained below the 50 boom/bust level for the fourth consecutive month – although it improved slightly from the period prior. Traders in Asia chose to focus on the official data, taking the euro higher, while traders in North America were much more sceptical, lending greater credence to the private Chinese PMI numbers – which in turn reversed all of the gains in the pair at the start of the week.

This kind of push-pull price action has characterised trading for the better part of the last two weeks and currency markets are unlikely to find traction until they get some directional clues from US data. With China in the midst of a slowdown and Europe at an effective economic standstill, global capital markets are looking to the US as the new engine of world growth. Although at first glance such a notion may seem absurd, given that China continues to expand at 7.5 per cent, while US growth is likely to remain a tepid 2 per cent going forward, the critical factor is not the absolute number, but rather the relative trend. China’s rate of growth is on decline, while US growth may accelerate, which is why right now the future of the risk trade depends so heavily on US economic data.

This week, as US data takes centre stage, currency traders will focus on two key data points – the ISM services report due on Wednesday and the non-farm payroll data due on Friday. The market is looking for a slight dip to 56.8 from 57.3 the month prior, but as long as the index remains well above the 55 level it should not cause too much of disturbance in the market. Similarly, on the employment front the market is forecasting 211,000 new jobs versus 223,000 jobs the month prior. But here, too, as long the over job growth is close to 200,000 the market should take the number in its stride.

One of the reasons why the bulls and the bears are at such a standstill at this moment is because no one is quite sure about the impact of high petrol prices on consumer spending. There is no doubt that $4 per gallon petrol is taking its toll on the psyche of the consumer – but so far its been very difficult to determine whether higher energy costs are forcing US consumers to materially curtail spending – which in turn could lead to much more modest growth than the market expects. This Friday’s US employment report will be the first major economic data point to account for the steep rise in petrol prices. As such, it may help answer the question of whether US economy can act as the engine of global growth in 2012 and finally dislodge euro-dollar from its very narrow $1.3250-$1.3400 range.