Overnight Headlines

*USD fell versus all its peers closing below 90

*US equities rose with tech leading the way, Nasdaq up 1.7%

*USD/CNH nearing 6.40, previous ‘line in the sand’ for PBoC

US equities closed near to the highs of the day with growth back as the leader, extending last week’s outperformance. Small caps beat large caps with tech and communication the standouts, while defensives lagged. Asian markets have followed Wall Street higher with European bourses set to open flat after the Whit holiday in parts of the region.

USD edged just above a four-month low once again as US bond yields fall close to two-week lows. Broader risk appetite saw EUR/USD push to the top of its recent range with bulls keen to break out past 1.2245. USD/CHF and USD/CAD both sit at their long-term lows waiting for the next catalyst to push further against dollar weakness. The long-term low in DXY sits at 89.20.

Market Thoughts – Volatility waiting to pick up

Fed speakers banged the drum again yesterday that the current rise in inflation is temporary while the data flow also didn’t live up to the strong-inflation narrative. Second tier data in the US, along with dovish comments from a couple of Fed speakers boosted risk as Governor Brainard said she still has not seen longer term inflation expectations rise substantially and the Fed has the tools to deal with them if they did.

With volatility remaining low in FX and equities, in contrast to the fireworks in digital assets and commodities last week, the weak dollar story should continue with the downtrend from the April in play.

Chart of the Day – USD on the brink

Last week’s taper talk didn’t especially help the greenback so unless there is a very sudden change of heart at the Fed, then the downtrend over the last couple of months should continue. USD/CNH is one pair to watch as there are stories circulating that yuan strength may be tolerated so as to insulate versus higher commodity prices. Support in this pair is hugely significant at 6.40, where the PBoC has intervened previously. Broad trends in USD/Asia also tend to support the overall USD trend.

Any definitive break of 6.40 will see EUR/USD rally strongly and cause a sharp rise in volatility with the dollar weakening across the board. The market would in effect be helping the PBoC to deliver a strong currency to fight import prices.