Overnight Headlines

*USD rose to a near three-month high, above post-Fed highs

*US equities ended mixed, closing out a strong first half

*Vix drops below 16, eyes turning to Q2 earnings

USD posted its biggest monthly rise since November 2016 with the DXY up over 2.8% in June. The EUR was pushed down to test 1.1850 support while JPY moved above 111 hitting highs not seen since March last year. Some of this strength is being put down to month end and quarter end flows. AUD and NZD are nearing their post-Fed flows with traders awaiting the RBA meeting next week for any potential hawkish shift.

US equities closed mixed with cyclicals outpacing growth and reversing some of the growth outperformance seen in the last few sessions. Energy and large cap industrials led the way while small caps underperformed. There are muted markets in Asia so far with US and European stock futures pointing to a marginally higher open.

Market Thoughts – King dollar hitting the highs

The dollar headed to its largest monthly rise since November 2016 supported by the surprisingly hawkish turn at the June FOMC meeting and the volte-face in their rates outlook. Though several Fed officials have tried to temper this view slightly, data is now all important as the market looks to see when tapering might commence.

Concerns over the spread of the Delta coronavirus variant also saw a bid to safe haven currencies. Several majors are now near or at their prior cycle lows as the DXY pushes on north this morning to levels last seen at the start of April. Of course, NFP will be the key driver for determining if this move continues or we see some retracement as we head into Summer.

Chart of the Day – USD/CAD may move on OPEC

Oil prices are a key driver of CAD and the market will be keenly following today’s OPEC+ meeting, where expectations are that the cartel will agree on a supply increase in the region of 500Mbbls/d. However, there are reports that the group is considering whether to increase output in August or September. While attention is clearly focused on what OPEC+ may do in the short term, according to Reuters, the OPEC+ Joint Technical Committee has said that there is a risk that the global market slips back into surplus when the OPEC+ deal ends in April 2022.

After forming a rounding bottom around 1.20/1.21, USD/CAD has edged back from the 1.25 zone after the Fed bounce. A bullish “cup and handle” could be forming with buyers targeting a sustained push through the 1.2475/00 area. Key dollar support lies at 1.2253, with both the OPEC meeting and NFP numbers set to cause a pick up in volatility.