US equities rebounded today but the lack of a meaningful recovery in currencies is a sign that FX traders do not share the optimism. The greenback traded higher on the hope that trade tensions will hurt other countries more than the US but it would be a mistake to think that US consumers and businesses will escape the pain. Wednesday' retail sales report is one of the most important pieces of US data scheduled for release this week. Spending is essential to the economy because without spending, there's no growth and without growth, there's no jobs.   However this month's retail sales report could be dismissed quickly because the level of spending in April is not an accurate reflection of the pace of demand going forward. Between the 1,000 point drop in stocks this month and the escalation of US-China trade tensions, consumers could be less and not more willing to spend in the months ahead. With that in mind, steady job growth, rising wages and higher gas prices should have lifted retail sales in April. At 0.2% expectations are low so it would not be a stretch for the data to beat. If consumer spending rises by 0.5% or more USD/JPY will rally but the move could fizzle underneath 110. At the end of the day, recent trade uncertainty will tarnish the optimism of the Federal Reserve and lead to a renewed slowdown in economic activity.

We are beginning to see signs of that in euro. There have been recent data improvements but analysts are worried about a deeper slowdown in the months ahead. The expectations component of the German ZEW survey turned negative for the first time since October and will sour further if Europe gets slapped with auto tariffs. At the end of this week, President Trump will turn his focus to Europe. After announcing fresh tariffs on China, Trump said he would make a decision on auto tariffs by May 18th. Europe's $50B car industry is at risk if Trump decides to impose new duties. Three months ago Trump was handed a report by the Commerce Department that would justify tariffs on the grounds of national security. That triggered a 90 day deadline for Trump to make decision. He could extend the deadline, which is what Europeans hope and investors expect but he could also slap Europe with tariffs of up to 25% on imported cars and parts. Regardless, the risk is high enough that euro traders will be eager to reduce their exposure ahead of the deadline.

The worst performing currency today was sterling, which fell hard on the back of softer labor market data. Jobless claims increased in the month of April but the real problem was earnings. Average weekly earnings growth slowed to 3.2% from 3.5% in the month of March. The job market is taking a turn for the worse and could deteriorate further as Brexit curtails business investment.

The commodity currencies were mixed. AUD and NZD shrugged off softer data. Business confidence fell in Australian while house sales declined in New Zealand. The Canadian dollar rebounded on the back of steady house prices and higher oil. CPI is scheduled for release tomorrow and the risk is to the downside given the nominal change in prices according to IVEY. While the downtrends for all 3 currencies remain intact, they have become oversold and slow moves to the downside suggests that given the right trigger, a short squeeze will happen easily.

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