Strategic Currency Briefing

Outlook:

Japan has had two earthquakes and now Ecuador has had one. Greece may be inching toward default again, or maybe Grexit. Brexit is starting to weigh on sterling but we don’t yet have the tsunami of selling that seems right around every corner.

As for Doha, the FT says the conference was “botched,” but this can’t be accurate—everyone knew Iran was not going to agree to an output freeze from the very beginning, so for the Saudis to insist at the last minute that all of OPEC had to sign on is some form of gamesmanship, but with fingers in more than one pie. The FT reports that the youngish new deputy crown prince Mohammed bin Salman is the guy who scotched the deal. Further, he said Saudi Arabia can increase production by over a million barrels a day if there is demand. Sounds like a macho threat worthy of Trump.

The champion of the producer agreement is the older (80+) oil minister Al-Naimi, who is seem-ingly being eased into retirement. This is the view of a Swiss oil consultant who says “Naimi wanted to see some non-Opec participation in supply management. He was about to achieve this. Yet those efforts were torpedoed at the last minute by Mohammed bin Salman and in that process Naimi will have lost credibility with Russia and will have as well upset other Opec and Gulf countries. The Doha agreement should have provided a moral rather than a physical support to the market as it would have created less of an environment for speculation about price wars. The failure of the Doha meeting reintro-duces those speculations.”

But Bloomberg has a different narrative from the FT, reporting it was al-Naimi who “insisted the draft agreement must include language that made the deal dependent on Iran’s eventual participation, partici-pants said. The start of the meeting was delayed several hours while officials sought to agree the text.” Bloomberg reports the Russians were “surprised” at the outcome. And “The fact that Saudi Arabia seems to have blocked the deal is an indicator of how much its oil policy is being driven by the ongoing geopolitical conflict with Iran,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University and a former White House official.

So, internal Saudi politics, perhaps, but how do those work? If it was the prince, he may have blown his chance to be a star. The market is headed toward “re-balancing” without a deal, according to the IEA and even the US EIA. Goldman Sachs says “… our outlook for oil prices remains that gradually im-proving fundamentals, driven by non-Opec production declines . . . will bring the market into a sustaina-ble deficit in the third quarter.”

OPEC meets again in June. Oh, to be a fly on the wall. Iran is hardly likely to fall into line that soon, so we should probably assume the Saudis will take whatever measures they can to twist Iranian arms. Un-fortunately, these efforts may spill over into the military arena. This is not going to end well, especially for the desperate (Russia, Venezuela).

We are focusing on the oil story because it’s central not only to economies but also to other markets—high correlation with equities—and perception of whether the world is a safe place, aka risk appetite and risk aversion. The Saudis ruining the Doha conference because of internal politics is bad enough, but Bloomberg names the Saudi stance a “fixation” with Iran, implying boots and bullets are all too likely to follow.

As long as the US stays out of it, there is little currency effect, but if the US starts rattling swords, the dollar almost always goes up. High and rising uncertainty helps the safe-haven dollar, too. The one surefire beneficiary of rising global risk aversion is the yen. The reversal that was developing last week, taking the dollar/yen to nearly 110 (off 107.95) seems to have fizzled. Again, we do not ex-pect intervention but this reversal is sure to cause some grumbling and rumbling in Tokyo. We already have a record long yen position in futures, 66,190 contracts as of April 12, surpassing the last record of 64,333 from March 8. The historical record is 65,902 from March 25, 2008. Remember that the Japanese stance is that extraordinary levels of speculation should be addressed. At what point does the G20 leash snap?

		Current	Signal	Signal	Signal
Currency	Spot	Position	Strength	Date	Rate	Gain/Loss
USD/JPY	108.45	SHORT USD	WEAK	02/04/16	117.57	7.76%
GBP/USD	1.4196	LONG GBP	WEAK	04/12/16	1.4309	-0.79%
EUR/USD	1.1298	LONG EURO	WEAK	03/11/16	1.1094	1.84%
EUR/JPY	122.53	LONG EURO	STRONG	03/29/16	127.24	-3.70%
EUR/GBP	0.7958	LONG EURO	WEAK	03/11/16	0.7759	2.56%
USD/CHF	0.9653	SHORT USD	STRONG	03/11/16	0.9877	2.27%
USD/CAD	1.2874	SHORT USD	STRONG	02/01/16	1.4031	8.25%
NZD/USD	0.6927	LONG NZD	STRONG	02/01/16	0.6478	6.93%
AUD/USD	0.7706	LONG AUD	STRONG	01/25/16	0.6980	10.40%
AUD/JPY	83.59	LONG AUD	WEAK	03/03/16	83.57	0.02%
USD/MXN	17.5883	SHORT USD	STRONG	02/23/16	18.1208	2.94%