Doha, Oil, AUD and Euro

After the Doha meeting of oil producers, the Canadian dollar should be trading much lower but instead of falling, the loonie ended the day higher versus the greenback. To be clear, at the start of the European session, USD/CAD rose within 10 pips of 1.3000 and was still trading above 1.2900 at the North American open but by the end of the day, it had fallen to 1.2800. This performance was completely counterintuitive even if we take all of Kuwait's news flow into consideration. The only explanation for CAD strength is its strong trend and a slightly larger increase in Canadian 10 year yields compared to U.S. yields. Oil started the day sharply lower after key producers failed to reach an agreement to freeze production but the losses were short lived as reports of a strike in Kuwait sparked a U-turn that briefly took prices into positive territory. However the Kuwaitis were quick to respond, bringing in workers from Egypt and Bahrain to resume production and by the end of the day reports that output from the Northern fields have returned to normal sent oil prices back into negative territory. All of these conflicting headlines took the Canadian dollar on a rollercoaster ride but if we take a step back, production in Kuwait will be back to normal before we know it and the hope that oil producers will take steps to create a floor faded when the Doha meeting ended. This means oil prices will remain low creating ongoing pressure on Canada's economy that should translate into weakness for its currency. We expect USD/CAD to find a bottom soon and make its way back up to 1.3000.

The intraday recovery in oil also lifted equities and high beta currencies. Like the Canadian dollar, stock traders focused only on the second leg of the move (the recovery) and not the decline that happened near the close. Investors were relieved that oil did not fall 10% on the back of the Doha and meeting and they were quick to reward risk currencies like the Australian and New Zealand dollars with gains. AUD/USD climbed to its strongest level in more than 9 months ahead of the RBA minutes. While higher highs confirm the breakout in the pair, a dovish tone could mark a near term top. If you recall, AUD fell sharply after the last RBA meeting after the central bank said, "Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy." Investors interpreted this to mean discomfort with the current level of the currency. However if the minutes are relatively benign, AUD/USD could make its way to its 200-month SMA at 0.7865.

Aside from the improvement in risk appetite, the New Zealand dollar also received a lift from a stronger than expected increase in consumer prices. CPI rose 0.2% in the first quarter, lifting the year over year rate to 0.4%. While this reduces the chance of another rate cut from the RBNZ, it does not eliminate it because prices are still running well below 2%. New Zealand's PMI services report is scheduled for release this evening followed by a dairy auction in the morning. Manufacturing activity and credit card spending slowed in March, signaling potential weakness in service sector activity. Dairy prices however ticked up at the last auction and investors are hoping that the momentum will continue.

The euro is in play this week with the German ZEW survey scheduled for release tomorrow, the European Central Bank meeting on Thursday and PMI numbers due on Friday. The currency clawed its way back above 1.13 versus the dollar, opening the door for a move back to 1.1400 but anything larger than that would be contingent upon this week's event risks. Investors are likely to be encouraged by the recent recovery in the DAX and since their last monetary policy meeting the only major issue for the ECB is the rise in the euro. Retail sales, inflation, activity and business confidence have improved since March, easing the central bank's concerns.

The best performing currency today was sterling, which extended its gains versus the greenback. The resilience of the currency remains impressive considering that Chancellor Osborne talked about the costs of Brexit and house prices rose by roughly the same amount in April as in March. There was nothing positive out of the U.K. today but as a high beta currency that takes its cue from risk appetite, sterling benefitted significantly from the rally in stocks. This is a big week for the U.K. with employment and retail sales figures scheduled for release - we expect both numbers to be weaker, keeping GBP/USD comfortably within its 1.44 to 1.40 trading range.

As for the U.S. dollar, it either held steady or traded lower against all of the major currencies. This is not a big week for U.S. data and most of the data releases are for housing. This morning we learned that builder confidence failed to improve in and tomorrow we will see whether that translated into lower housing starts and/or building permits. Tonight Fed President Rosengren speaks and as one of the more dovish voting members of the FOMC, he will most likely highlight the uncertainties and headwinds facing the economy. After trading below 108, USD/JPY ended the day near its highs. While the downtrend is intact, this suggests that we could see a brief move above 109.