US FX WRAP: Dollar loses out in thin trade after soft Retail Sales and UoM while USD/JPY sees two-way trade
The Dollar Index was lower vs. G10 FX peers, albeit in very light newsflow, as disappointing retail sales and prelim UoM for August did little to move the needle. The data did little to impact markets despite the weakness, with money market pricing little changed on the day. Participants are still pricing in a hold with more certainty than a hike following last week's NFP report and soft/in line inflation prints.
All G10 FX saw gains to varying degrees against the Greenback, with the Kiwi and CAD the outperformers and the Yen and Swissy the relative laggards. For the former, it saw choppy price action after another BoJ source said the bank was set to raise interest rates as soon as September. Regarding the BoJ, money markets assign a roughly 80% probability of a 25bps hike in September.
As mentioned, the Kiwi was the best perfomer and pared losses following Thursday's soft inflation expectations survey. Overall, and to avoid sounding like a broken record, currency specific newsflow was thin in summer trading conditions as desks await the next catalyst.
Sessions of this kind, soft US data landing in thin summer liquidity, have a familiar shape: the dollar sells off against the G10 board but the move lacks conviction because the releases are second tier and positioning rather than fresh information does the work. The telling detail is that money market pricing was little changed despite the weakness in retail sales and sentiment; in past episodes where soft data fails to shift the front end, the FX move has tended to fade rather than extend, since it is rate expectations and not the prints themselves that anchor the dollar. The more substantive thread is USD/JPY, where another round of source reporting on a near-term BoJ hike has produced two-way trade, the established pattern when official-sourced guidance is weighed against a long history of the bank backing away from tightening on soft data. Pricing around a high probability of a September move means the asymmetry sits with disappointment, and the watch items are further sourced stories, BoJ board commentary, and the intervening Japanese data. The underperformance of the yen and franc alongside leadership from the Kiwi and CAD is consistent with a low conviction dollar down day rather than a risk event. The next catalysts are the calendar heavyweights, with desks explicitly in waiting mode.