DOLLAR RETREATS INTO THE WEEK’S CLOSE, RISK TRENDS FRONT AND CENTER AHEAD

Talking Points:

• An attempt at a rebound in risk trends fell apart Friday with speculative appetite following deeper fears over headlines
• The Dollar suffered a sharp correction into the close Friday despite the PCE inflation figure lifting rate forecasts
• Emerging moves from the Euro, Loonie and Pound should be treated as carefully as weathered runs like the one from Crude oil

A RISK RECOVERY OVER THE COMING WEEK, MONTH, QUARTER LOOKS FRAUGHT

The market's attempt to forge a meaningful recovery on Thursday's strong jump fell apart before the New York session closed for the weekend. That should not be too surprising. Committing to a clear risk position before the liquidity drains for the weekend in a time when Saturday and Sunday headlines have been regularly dramatic and dominant threats like trade wars are still escalating (much less seem close to resolution) is exceptionally risky. From the US indices, we would see the failed effort play out clearly. The S&P 500 made a run to immediate resistance at 2,740/45 and even seemed as if it would make a serious attempt to clear the boundary. Yet, by the end of the day, all that enthusiasm fell away. There were plenty of headlines that would have undermined this move, but they didn't seem to instigate the retreat. A speculative run failing due to its own lack of enthusiasm is far more discouraging than a response to news. Nevertheless, news that Canada was implementing a $12.6 billion retaliatory tariff, the ECB president issued a stark warning about trade wars to EU leaders and auto manufacturers condemning trade wars won't offer much confidence for the week ahead. That said, nor would potential from positive sentiments like reports President Trump was considering another corporate tax cut support lift.

DOLLAR FALTERS AT THE FINISH LINE

It really isn't the 'ends' to the Dollar bulls' run, but the 1.1500 level on EURUSD is certainly a critical technical milestone for which we will be evaluating the weight of the currency's trend. The benchmark currency steadily worked its way up through this past week on an index basis, but the progress was notably choppy. For the benchmark currency pair, all the hard fought Greenback gains would merely bring us back to well-worn floor the EURUSD has forged over the past month. When it came time to make a decisive move, the response was a pullback. There are certainly medium-to-long-term troubles facing the world's most heavily traded currency from reserve status to trouble as a 'risk' currency to a growing capacity for disappointment in rate forecasting. Yet, none of that has to necessarily weigh the Dollar now. Ending off this past week, the PCE deflator (the Fed's favorite inflation reading) hit the central bank's 2.0 percent target pace in nearly six years, but Chief Economic Adviser to the President Larry Kudlow's obvious call for the Fed to temper is pace of tightening opened up a new political risk front for Dollar traders. For a Dollar retreat, I like USDCAD and GBPUSD while EURUSD is still the best option should the Greenback muster another incredible run. Top scheduled event risk ahead is the NFPs on Friday, but open themes like trade wars and risks trends will likely carry far more weight.

GENUINE CONVICTION FOR THE EURO, POUND AND LOONIE?

With the Dollar suffering a late retreat this past week, it would be fair to assume that a number of the benchmark's major counterparts were seeing their own advance. That was indeed the case for the Euro, Pound and Canadian Dollar. Yet, just as the Dollar's performance doesn’t necessarily come with the strongest fundamental backing, nor did these currencies present the most robust cause for reversal. The Euro's rebound Friday was broad and seemed to gain much of its heft from news that the EU leaders’ summit had finally broken an impasse with a loose agreement over migration issues. How much confidence can that really supply however when there are still systemic risks to EU stability and with ECB President Draghi warning these same leaders that they may not fully comprehend the risks from trade wars? That remains to be seen. For the Pound, secondary data offered the flimsiest of reasons to advance. Traders in this currency should keep their focus on Brexit, for which it was reported an EU prime minister remarked their fear of a 'no deal' outcome had jumped to 50/50 after UK PM May addressed the group Friday. As for the Canadian Dollar's charge, it seems to reflect the most reliable strength. The April GDP reading was only modestly bullish and BoC business sentiment report uneven, but the Loonie has seen a significant drawdown and the central bank rate outlook is still remarkably robust. Key Canadian data next week is Friday's trade and employment statistics, but watch first for fallout from Trudeau's retaliatory tariff announcement.

TRACKING EXTREME MOVES FROM THE KIWI, YUAN AND OIL

In contrast to the fledgling moves of the three currencies above, we have seen more exaggerated - both in terms of intensity and duration - drives pop up in the market. Perhaps under the radar, the New Zealand Dollar has suffered a heavy decline these past weeks that has translated into significant technical developments for the likes of NZDUSD and NZDCAD. Rather than specific catalysts, this seems the result of a currency simply losing its status in the market. For the Chinese Yuan, the fundamental drive behind the record breaking 11 consecutive trading day USD/CNH rally is clear. The trade war between the United States and China is particularly acute yet also isn't playing out according to a clear set of rules. There is risk aversion at work with capital moving from China to the relative (and increasingly marginal) safety of the US markets, but this progress is just as likely shaped by influence from Chinese authorities. Finally, one of the second quarter's most impressive performers, US-based crude oil, finished out the period strong. Defying the supply side growth seen from the US and OPEC+ as well as the downgrade in demand via growth forecasts, the managed to close at $74.25 for the highest perch since November 2014. We discuss all of this and more in the weekend Trading Video.

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