How Important is the Doha Meeting for FX?

This weekend's meeting of OPEC and non-OPEC members in Doha is important for currencies because when oil bottomed at the beginning of the year it set a peak for the U.S. dollar. If you recall, the greenback was trading strongly when oil prices hit a 10 year low of $26.20 a barrel and when oil started to recover, the dollar index lost its momentum and began trading sharply lower. So not only is the dollar's value important for oil but in recent years we've also seen how oil can impact currencies and equities. Oil is particularly important to the Canadian dollar but it can also affect the market's overall risk appetite. For the past few months, investors have been patiently waiting for oil producing nations to officially freeze production. In mid February, Saudi Arabia and Russia, the world's two largest oil producers made a preliminary deal to freeze output but it was contingent on Iran's participation. Unfortunately Iran supported the deal but refused to comply until their production returned to pre-sanction levels.

This weekend, we will see if oil producers are willing to move forward without Iran's cooperation. If they agree to freeze production, relieved investors will reward the decision with higher oil prices, rallies for stocks, a lower U.S. dollar and stronger commodity currencies but in order for there to be any real continuation oil producers need to cut output and that's unlikely. Saudi Arabia and Russia are producing oil at record levels and an output halt would still mean 300 million extra barrels of oil per year for the world excluding the added inventory provided by Iran. The International Energy Agency believes that a deal would not rebalance supply before 2017. A production cut was far more likely when oil was below $30 a barrel but at $40, the pressure to make any drastic changes is limited. Of course, in the event of no deal, oil prices will collapse, commodity currencies will fall, stocks will extend lower and the dollar will rise as risk aversion returns to the markets. Either way the Doha meeting is an extremely important event risk for the FX market this weekend.

The U.S. dollar traded lower against all of the major currencies today on the heels of mostly softer U.S. data. Although manufacturing activity in the NY region expanded at its fastest pace in more than a year, industrial production contracted sharply and consumer sentiment hit its lowest level in 7 months. Americans are concerned about the upcoming election, wage growth and household finances, which may explain why spending has been so weak. Outside of a few upside surprises, most of this week's U.S. economic reports highlight the ongoing challenges in the U.S. economy. Not only will the Federal Reserve refrain from raising interest rates in 2 weeks but the FOMC statement could contain slight downgrades to their assessment of the economy. We expect the dollar to resume its slide in the days and weeks ahead. USD/JPY is looking particularly vulnerable as more earthquakes hit the south of Japan and tsunami warning has been issued.

Both the euro and British pound traded higher against the greenback today. There was no data released out of the U.K. and the euro shrugged off softer trade numbers. The big news for the pound was the announcement of a replacement of Martin Weale, one of the more hawkish members of the central bank. Former Citigroup economist Michael Saunders will be joining the policymaking committee starting on August 9th. Considering that he sees the first rate hike in the second quarter of next year, he has a far more dovish posture than Weale. Europe will be in focus next week with the U.K. releasing employment and consumer sending numbers. The Eurozone has a central bank meeting and PMI numbers. The ECB is expected to leave interest rates unchanged but as usual, the tone of Mario Draghi's press conference will have a great impact on the euro. At the last monetary policy meeting, Draghi signaled that rates were at their lower bound and this sent EUR/USD sharply higher. This morning, he sounded slightly less optimistic. While he indicated that the region is on path for gradual recovery he also said the outlook for growth was faced with uncertainty and the risks are to the downside.

Yesterday, the New Zealand dollar underperformed the Australian dollar and today, we saw the reverse although stronger Chinese data drove both currencies higher. China's GDP growth slowed to 6.7% in the first quarter which was right in line with expectations and therefore provided no significant damage to the comm dollars. Instead forex traders latched onto the healthier industrial production and retail sales numbers - two indicators that reinforce the signs of stabilization in China's economy. As we said, if Chinese data is good, AUD will see new highs. It failed to reach those levels today but the trend is strong and AUD/USD still appears poised for additional gains.