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What's Doha Got To Do With FX?

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Publish date: Sat, 16 Apr 2016, 09:06 AM
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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. dollarIf 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 it 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 its production returned to pre-sanction levels.

This weekend we'll 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 change 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.

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

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