Trump Spares Europe, But US Retail Sales Spell Trouble for USD

US retail sales was the main focus today and if that was the only story, the greenback would be trading much lower against all of the major currencies. The contraction in retail sales last month caught the market by surprise. Instead of rising 0.2%, spending dropped by the same amount. This was the third negative retail sales print in five months, which tells us that despite the steady improvements in the labor market consumers are cautious and not liberal with their spending. Higher receipts at gas stations failed to offset the decline in spending on electronics, building materials, vehicles and parts. Excluding auto and gas, spending fell -0.2%. Although manufacturing activity in the NY region accelerated, industrial production fell for the third time in 4 months. These numbers alone should make investors worried but when they are combined with trade tensions, investors need to be weary of a further slowdown over the next 3 to 6 months. We expect US data to soften which will limit the recovery in stocks and USD/JPY. At most, USD/JPY could recover to 110.50-111 but the rally should fizzle around that level.

The primary reason why we did not see broad based weakness in US assets from stocks to the dollar was because of reports that President Trump plans to delay auto tariffs by up to 6 months. The official announcement hasn't been made yet (he has until Saturday) but the mere hope that he won't be taking on China and Europe at the same time is a big relief for investors. Euro rebounded above 1.12 and could trade back to its May highs in the days ahead. Eurozone GDP numbers were right in line with expectations - Germany's economy expanded by 0.4% in the first quarter and this improvement helped the EZ achieve the same pace of growth. Year over year growth remain unchanged at 1.2% for the region but annualized growth in Germany slowed to 0.6% from 0.9%. We're not excited by European growth prospects but these numbers should be good enough to stem the slide in the euro ahead of Trump's auto tariff decision this week. The Eurozone's trade balance report is scheduled for release tomorrow and the improvement in Germany signals strength for the region as a whole. Currencies also received a lift from the US and Mexico's agreement to lift steel and aluminum tariffs.  

There was no UK data on the calendar but sterling was the day's worst performing currency. UK Prime Minister May is scheduled to meet Conservative backbenchers tomorrow to discuss her future. There's been growing pressure on May to provide a timetable for her resignation but she has made it clear that she will not resign before a Brexit deal is approved by Parliament. There are reports that she could resubmit the Withdrawal Bill in June. Softer UK labor data combined with risk aversion and the lack of progress on Brexit talks has hit sterling hard. The next stop for GBP/USD could be the 2019 low of 1.2773.

Meanwhile the Canadian dollar traded higher despite lower price pressures.Consumer price growth slowed to 0.4% from 0.7% in April. The year over year rate rose but the trend of inflation is lower because core price growth eased. The Australian and New Zealand dollars extended their losses with AUD/USD falling to fresh year to date lows because China's trade troubles hurt Australia the most. A$ remains in play with Australian labor market numbers scheduled for release this evening. According to the PMIs, labor market conditions in all 3 key sectors of the economy - services, manufacturing and construction weakened so the odds favor a softer release that could extend the Australian dollar's losses.