The Week Ahead

US vigor will continue to surprise street economists, world investors and Fed officials alike.

Look for the few scheduled releases next week to cooperate.

Clients have had a firewall of sorts built around their trading, investment or corporate planning activity. They have known through Q4 to trade the US as if every surprise was to be one of relative strength, not weakness. Most were. Jobs-related and consumer activity were key.  And these will hold through Q1. Stronger import orders suggest good demand for consumer goods; the trend in Claims suggest better payroll numbers ahead.

Then on Dec/15 we added Manufacturing, noting that “economists will miss the boat because they will under-estimate export demand, thinking it to be completely dried up.”

Indeed, from the ISM manufacturing index and to almost everyone’s surprise, export orders rose in December to the highest level in three months; overall orders were the best since April. Thank you very much.

Next, clients were not only prepared for improvement in the US but also vs other major world credits. That too has worked well as economist after economist discovers what most call, with the sense of original discovery, a de-coupling.  ISM manufacturing data did show just that - the US continued to pull away from Europe and China, with a bigger increase, to a higher level than any of the others.

In a nutshell, we can get along without the E-Z; they don’t have to solve all of their problems for us to do well (however, we could do without a meltdown!). And that related panic has limited trading our insight through the FI market.   Our view would “normally” be best worked with the curve, Eurodollar calender spreads, options and the like. In fact, the next major move in the US curve will be steeper, tagged to vigor and Fed accommodation.  But we may have to wait a bit for that.

FX has provided a convenient tool however, as our most recent recommendation, short the Euro to the US$ has demonstrated.

We can also look to Canada for opportunity. We know that Canada will tag along. Selecting a window is key.  That could have been provided by last week’s Canadian Payroll results; they were not at all buoyant as they were expected to be. Partly as a result of that, the C$ slumped to a two-week low. But Canada is our biggest trading partner by far; by understanding economic reality ahead for the US, we pretty much have it for Canada. So we can expect their economy and currency to do well, H1, and that despite severe budget cuts scheduled by the Harper administration. Thus, one will want to look to sell the Euro and buy the C$ against that, at the next convenient window.

Robert Craven