Overnight Headlines

*USD hovers around recent highs after second straight day of gains

*US stocks were mixed with the Nasdaq underperforming

*Oil is higher for a sixth straight day, through $80

*US 10-year bond yields hit 1.5% on the back of hawkish Fed comments

USD pushed higher into resistance around 93.43. The year-to-date top is at 93.72. EUR held close to 1.17 with the cycle low at 1.1663 GBP traded just above 1.37 after the BoE’s Bailey said higher rates would be needed if a response to inflation was required. USD/JPY blasted through 110.80 resistance. Bulls are eyeing the July 111.65 high as yields propel the major higher.

US equities saw an uneven session with the Dow gaining 71 points, but the S&P500 and Nasdaq both dipping -0.3% and -0.5% respectively. Banks are the big beneficiary of higher yields and the energy sector is benefitting from higher oil prices. Healthcare and tech are the laggards. Asian stocks are mixed while futures are flat.

Market Thoughts – It’s all about oil and yields

Oil surged past $80 as the lack of natural gas is becoming a global issue and forcing a switch to oil as an alternative for power generation. The economic recovery is also seeing more demand in general with a pickup in airline traffic depleting low oil inventories. Nest week’s OPEC+ meeting is key. But there is increasing concern that the group will be reluctant to raise output enough.

US bonds are also under pressure, meaning yields are going higher. The 10-year Treasury hit 1.51% and the five-year touched levels not seen since February 2020. Inflation expectations are moving up too as the market begins to question the Fed’s “transitory” narrative. Rising bond yields will also challenge risk appetite at some point, but we are probably not there yet.

Chart of the Day – USD/CAD breaking lower?

CAD is the most correlated major currency to oil prices (apart from NOK) and is enjoying the week so far against its peers. Brent has broken the $80 barrier and is on its sixth straight day of gains. That said, technical indicators are showing it as overbought now.

USD/CAD is at a pivotal support point as risk sentiment is helping the loonie. But energy shortages mean the backdrop remains fragile which is supporting the dollar. The major has moved lower this morning through trendline resistance from the June lows. The 50-day SMA also sits around here just above 1.26. A decisive break here will quickly drop to 1.25 with the 200-day SMA at 1.2519. Resistance comes in around the 1.27 zone.