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Indecisive financial market sentiment and tight trading ranges across key asset classes in recent weeks should make this week significant for market direction.

Markets would look to the critical upcoming US non-farm payrolls data and other economic data releases to drive more decisive moves in the US dollar. Strong surprises in US employment data for August could decide trends for the greenback and equities through September.

A steady trend of disappointing US economic data led Federal Reserve chairman Ben Bernanke to discuss expanding monetary policy stimulus last week.

This week’s fundamental data releases may prove critical in setting market expectations for the Fed’s subsequent policy moves. Given that the Fed has a mandate to control inflation and maximise employment, continued disappointments in the non-farm payrolls data could force the US central bank into easing action. The payrolls data, due to release on Friday, could drive volatility.

It will also be important to watch the usual string of early-month economic data releases leading up to the employment data. Other key US data releases include Conference Board consumer confidence results, minutes from the most recent US Fed FOMC meeting, ADP employment change data and new and pending home sales reports.

Each one of these releases could potentially force sharp swings in the greenback, and it will be important to monitor general financial market risk sentiment trends leading into Friday’s event risk. The dollar stands at a potentially significant juncture. Whether sharper price moves will strengthen or weaken the dollar may very well depend on the events this week.

In the local inter-bank market, the rupee could get some support from the greenback’s weakness overseas. Among fundamental drivers, the GDP data for the first quarter of this fiscal is due on Tuesday. The headline real GDP growth number is going to be well over 8% and that should reinforce positive sentiment towards the Indian economy and the rupee, especially from a medium-term perspective.

In the near-term, global risk trends and their bearing on the local stock market, would guide the price in the rupee-dollar pair. Any downward correction in the local equities on account of valuation concerns or investor risk aversion would put downward pressure on the rupee. On balance, during this week, the rupee-dollar pair could continue to trade within the 46.50-47 range but with a weakening bias.

In the currency markets last week, the yen surged to a 15-year high against the US dollar as fading confidence in the global economy drove safe haven demand for the Japanese currency.

The move raised the spectre of the Japanese authorities intervening in the market for the first time since 2004 to stem the rise of the yen.

A stream of poor US economic data, including a plunge in home sales, sent equities and US Treasury bond yields lower, pushing the yen to its strongest level since 1995 on Tuesday. Comments on Friday from Fed chief Bernanke, who said US recovery had softened more than expected, added to the deterioration in sentiment.

That raised the prospect that the yen could threaten to rise to the record high of 79.70 it hit in April 1995. This hurt Japanese stocks, which dropped to their lowest level of the year, and caused consternation in Japan that a strengthening currency could stifle economic activity.

Japanese officials raised their verbal intervention in a bid to stem the yen’s rise, with almost daily pronouncements about the currency’s strength.

However, market participants became increasingly skeptical that Bank of Japan would intervene in the market. That was reflected in the muted response to comments on Friday from Japan’s prime minister, Naoto Kan, who said his government was ready to take “bold” action in the foreign exchange markets.

Over the course of the week, the yen rose 0.5% against the US dollar. It also hit a nine-year high against the euro during the week, and rose 0.6% against the pound over the week.

Rising risk aversion also boosted haven demand for the Swiss franc, pushing it to a record high against the euro on Wednesday. Over the week, the Swiss franc rose 0.2% against the Euro and climbed 0.6% against the US dollar.

The greenback finished the week nearly unchanged against major counterparts, rallying notably at the outset but giving back gains into Friday’s close. Market participants forced noteworthy US dollar losses on Bernanke’s relatively somber outlook for growth and hints that the Fed could enact further quantitative easing of monetary policy.

Against the Euro, the US dollar was down 0.4% over the week and flat against the Pound. The greenback also fell against commodity-linked currencies. Over the week, the US dollar fell 0.5% against the Australian dollar.

In the local inter-bank market, the rupee lost ground against the greenback last week on the back of a rally in the dollar overseas and a slide in the stock market. Portfolio inflows also reduced sharply compared to last few weeks while dollar demand for corporates remained strong. The rupee-dollar pair traded in the range of 46.56 – 46.965 and the rupee depreciated by 0.5% against the greenback over last week.

The writer is senior economist, Royal Bank of Scotland NV, and can be reached at gaurav.kapur@rbs.com. Views are personal.